Budgeting: How to Create a Budget

Spread the love
How to Create a Budget

In its simplest form, budgeting is a third-grade math problem.

If I have take-home pay of, say, $2,000 a month, how can I pay for housing, food, insurance, health care, debt repayment and fun without running out of money? That’s a lot to cover with a limited amount, and this is a zero-sum game.

You can’t thrive for long by spending more than you take in.

How do you decide what’s important and where to spend most of your money? If your expenses outpace your income, what can you do? How can you cope with unexpected major expenses?

For all these questions, a budget is the answer. Here’s how to set one up.

How to create a budget

  1. Figure out your after-tax income. If you get a regular paycheck, the amount you receive is probably it, but if you have automatic deductions for a 401(k), savings, and health and life insurance, add those back in to give yourself a true picture of your savings and expenditures. If you have other types of income — perhaps you make money from side gigs — subtract anything that reduces it, such as taxes and business expenses.
  2. Choose a budgeting plan. Any budget must cover all of your needs, some of your wants and — this is key — savings for emergencies and the future.
  3. Track your progress. Record your spending or use online budgeting and savings tools.
  4. Set yourself up for success. Automate as much as possible so the money you’ve allocated for a specific purpose gets there with minimal effort on your part. An accountability partner or online support group can help, so that you’re held accountable for choices that blow the budget. And leave a little room in your budget for fun, too.
  5. Revisit your budget and tweak it as needed. Your income, expenses and priorities will change over time. Adjust your budget accordingly, but always have one.

A budget is a plan for every dollar you have. It’s not magic, but it represents more financial freedom and a life with much less stress.

Learn what budgeting looks like

We recommend the popular 50/30/20 budget.

Bankruptcy expert Sen. Elizabeth Warren, D-Mass., co-wrote “All Your Worth” with her daughter Amelia Warren Tyagi. In it, they recommend a budget where you spend roughly 50% of your after-tax dollars on necessities, no more than 30% on wants, and at least 20% on savings and debt repayment.

We like the simplicity of this plan. Over the long term, someone who follows these guidelines will have manageable debt, room to indulge occasionally, and savings to pay irregular or unexpected expenses and retire comfortably.

Those proportions may be wildly out of whack until you get your finances on track. “It’s not unusual for people to be spending 70% or more on must-haves, which explains why it’s so hard for them to save and pay down debt. There just isn’t room,” says Liz Weston, NerdWallet columnist.

Get Daily Updates
Enter your email address and click on the Get Instant Access button.
We respect your privacy

Leave a Reply

Your email address will not be published. Required fields are marked *