Creating a budget means tracking your income and expenses. How much money do you make each month, and how do you spend or save that money? Is there room for improvement? A budget puts you on a path to achieving financial goals. Budgets can be flexible, since they’re meant to keep people on track, and not set in stone. The important part is cash flow: being able to afford expenses as needed.
- Short-term goals: Don’t overspend your money. Make sure it’s allocated properly so you don’t run out of cash.
- Medium-term goals: Save money for large expenses or unforeseen major emergencies within the next couple of years.
- Long-term goals: Properly manage debt, save money toward retirement, or other future goals.
Everyone needs a budget, from individuals to large corporations. Proper accounting can be game-changing or even life-saving. And it’s easier and faster to set up than most people believe. There are different ways to create a budget. Some people like to do it manually (Excel Spreadsheets, written notes, etc.) while others prefer budgeting apps to automatically do the heavy lifting. We have a list of potential tools at the bottom of this article.
Many finance experts currently advocate a “50-30-20 rule” for budgeting.
- 50% of your income toward essentials/needs (rent or mortgage, bills and utilities, transportation, insurance, groceries, etc.)
- 30% of your income toward “wants” (dining out, shopping, subscriptions, travel, hobbies, etc.)
- 20% of your income toward debt repayment, savings, or investments
If you’re doing very well, you want increasing percentages of money to go into savings/investments/assets. At basic levels though: When it comes to savings, first aim for a $1,000 emergency fund. It’ll give you some breathing room if something bad happens. After that, aim for having 3 months of expenses covered. The most common recommendation for an emergency fund is 3-6 months of expenses. This is another reason to create a budget. If you don’t know what your expenses are, then it’s impossible to accurately determine the size of your emergency fund.
Overall, these budgeting guidelines are to help people get started. There aren’t strict rules and you probably don’t need to micromanage funds. You’ll have to create a budget based on your unique situation. Specifics are always subjective. After reading this entire article, you should know exactly what to do.
Example budget 1:
The average full-time US wage is close to $4,000 per month (nearly $52,000 per year) pre-tax, according to 2022-2023 statistics. We’ll round down to $3,000 post-tax monthly income. Using the 50-30-20 allocation for someone who’s debt-free, this could be divided as:
- 50% ($1,500) NEEDS
- $900 Rent and bills/utilities (electricity, internet, rental insurance, laundry, etc.)
- $350 Health/dental/vision insurance and other medical expenses
- $250 Groceries and other essential supplies (dish sponges, shampoo, toothpaste, etc.)
- 30% ($1,000) WANTS
- $300 Shopping or entertainment (movie tickets, museums, clothing, etc.)
- $200 Vacation fund
- $200 Dining out or food delivery
- $200 Hobby or side hustle expenses
- $100 Subscriptions (gym membership, Netflix, Spotify, etc.)
- 20% ($500) SAVINGS
- $500 savings (HYSA: high yield savings account) Note: Money here would go into savings until there’s an emergency fund of 3 months of expenses ($9,000 in this case, which would take 1.5 years to save up at the 20% rate). After that, when the emergency fund is fully funded, excess money typically goes into investments (a personal brokerage account, IRA, 401(k), HSA, etc.)
- Total: $3,000 in expenses vs $3,000 in income, with each dollar neatly accounted for
Some people recommend that each non-housing spending category (dining, gas, shopping, etc) shouldn’t exceed 10-15% of income. The above budget sticks to the 10% number in almost all cases ($300 maximum per category).
Budgets can be as broad or as specific as you’d like. Remember, there isn’t a need to penny-pinch. It’s often a bad idea to devote too much mental energy to minutiae. Just check transactions and balances from time to time, and correct areas when necessary. For example, if half your money is spent on eating out, you should scale back. Those funds can be put to better use elsewhere.
Example budget 2:
Here’s an example of an imbalanced budget for someone trying to live on $2,000 per month:
- 50% NEEDS (should be $1,000 but is $1,300)
- $800 Rent and bills/utilities (electricity, internet, rental insurance, laundry, etc.)
- $300 Health/dental/vision insurance and other medical expenses
- $200 Groceries and other essential supplies (dish sponges, shampoo, toothpaste, etc.)
- 30% WANTS (should be $600 but is $700)
- $200 Shopping or entertainment
- $400 Dining out or food delivery
- $100 Subscriptions (gym membership, Netflix, Spotify, etc.)
- 20% SAVINGS/DEBTS (should be $400 but is $500)
- $300 student loans or continuing education
- $200 credit card debt
- Total: $-500, going further into debt every month
In this case, there are obvious changes that’d increase financial health. The overall lifestyle is unsustainable. Cutting out dining/shopping expenses immediately balances the budget. The dining category is 20% of income instead of the recommended 10-15%. Shopping is at 10% so it isn’t “too high.” However, it’s an issue in the larger context (insufficient income compared to expenses). Optional expenses are always first on the chopping block. In this example, the “needs” category is too high, so the individual should consider moving somewhere less expensive. If that isn’t possible, they’ll have to be extra-critical of the “wants” category.
If you’re coming up short every month, and can’t cut back any more, you’ll have to increase your income. If possible, a remote-work job can make a big impact. It immediately lowers transportation expenses, reduces wear and tear on clothing, and gives you a little more free time to sleep/cook better. A few people discuss having multiple work-from-home jobs, although that’s a controversial option.
The problem with cutting expenses is that it’s limited. There’s only so much you can do. Income, however, has no upper limit. Figuring out how to increase your income might not be easy, but if done correctly, it can fix any cash flow issue under the sun.
As a final reminder, financial plans aren’t set in stone. They’re a general initial framework. Budgets should be tailored to your individual needs. Most people don’t understand budgeting at all, so even a quick attempt is a big step in the right direction. According to a Freakonomics podcast episode, only 30% of Americans are “financially literate.”
We’ll cover further steps in future articles. Stay tuned for more!
Popular Budgeting Tools and Apps
You Need A Budget (YNAB) – 34 day free trial, then $15/mo or $99/yr
Intuit Mint – free, with a no-ads tier ($1/month) and Premium tier ($5/month) UPDATE: as of January 1st, 2024, Mint will be unavailable. Mint users are being transitioned to Credit Karma, which is a free platform with different features.
Personal Capital – free
Everydollar by Dave Ramsey – free (limited) or paid ($130/yr is the cheapest option)
Spendee – free (limited) or paid ($15/year or $23/year)
Honeydue – free (ad-supported), and aimed at couples
Monarch Money – $10/mo or $90/yr annual plan; supports multiple users
Goodbudget – free or $70/yr (the free version keeps just 1 year of history, and the paid version goes up to 7 years)
Pocketguard – free, or $35/year, or $80 for a “lifetime” subscription
NerdWallet – free app?
Banktivity (iOS only) – $50 to $100 per year depending on features needed
Copilot (iOS only) – $95/yr
Alternatively, you can make an Excel spreadsheet (Google Sheets is a free alternative) and enter things manually. Similar to the now-semi-obsolete “balance your checkbook” concept. This can get complicated with multiple accounts, though. Tracking your expenses and budgeting manually doesn’t work well unless you have just a few accounts (such as 1 checking, 1 savings, 1 investment/retirement, 1-2 credit cards). It’s much better to use automated apps/services like the above options if you have more than a few accounts. You’ll free up a lot of time and energy if the work is already done for you.
Some banks have their own financial tools as well. Check with your preferred institution to see which options are available. These are more limited than budgeting apps, but could be convenient and free.
Note: The listed app/tool subscription prices are current as of November 2023 and are subject to change. We have not reviewed or endorsed these products and have no affiliation with them. The above list is provided for informational purposes only. We are not recommending any product or service in this article.