How to budget: 5 tips to get started

Jose Luis Pelaez Inc/Getty Images

When Bankrate surveyed Americans about their financial security earlier this year, 85 percent of respondents shared some kind of financial regret. While they covered a wide range of issues – failing to save enough for emergencies, racking up too much credit card debt and buying a house that cost too much, for example – each of the missteps shared one commonality: They could have been avoided with a budget. If you’re thinking about creating a budget, here’s a rundown of why you shouldn’t delay those plans any longer – and how to get started today, regardless of how much money you’re currently earning.

The benefits of creating a budget

If you’re struggling to put budgeting at the top of your to-do list, it’s important to recognize the key benefits.

With a proper budget in place, you’ll be able to rest easy knowing you’re well-prepared for short-term unexpected expenses and that you are setting yourself up for long-term financial success. Instead of thinking about it as budgeting, reframe it to think of it as knowing where your money is going and maximizing your pathway to savings so that it can help you enjoy your life more. That pathway looks a bit different for everyone, but there are some guiding principles that can help on the journey.

Simple budgeting plans

One of the most common approaches to budgeting involves the 50/30/20 rule, which helps you divide your short-term spending plan and your long-term saving strategy into three basic categories: the products and services you absolutely must have, the activities and items you would like to have and the saving you need for a successful future. For example, if you earn $4,000 after taxes each month, the 50/30/20 rule gives you $2,000 (50%), $1,200 (30%) and $800 (20%).

50%: Needs

  • Housing
  • Groceries
  • Transportation
  • Utility bills
  • Health insurance
  • Minimum loan payments

30%: Wants

  • Dining out
  • Entertainment subscription services
  • Movies
  • Concerts
  • Vacations
  • Athletic club memberships

20%: Savings

  • Emergency fund
  • Retirement fund
  • Investments
  • Any other long-term saving objectives

Another traditional budgeting option involves something you might not use too often: Physical envelopes. The envelope method separates individual budgets for specific categories to help you associate the physical spending of cash – withdrawing dollar bills from an envelope – with your spending. If the convenience of credit cards has created overspending issues for you in the past, the envelope approach can help establish tangible limits. Once an envelope is empty, you’ll need to wait until next month for any more expenses in that category.

5 steps to creating a budget

Here are five key steps to follow to create a budget.

1. Pay yourself first

If you try to save what’s left over at the end of the month, you’ll likely run into a major roadblock: There is rarely any money remaining. Instead, make saving your No. 1 priority.

It’s wise to stash away between 10 and 15 percent of your income between your employer-sponsored retirement plan and building (and regularly replenishing) your emergency fund. By contributing to that retirement plan and setting up a direct deposit from your paycheck into a dedicated savings account or money market account, your funds are automatically ushered away from the temptation of spending.

2. Map out your spending

After you put aside the money you want to keep, it’s time to analyze how to live on the money you have left. Spending 30 percent of your monthly income on housing (including property taxes) is a good rule of thumb, but the reality is that affordability continues to be squeezed in a hot housing market. So, be sure to focus on your flexible costs. Compare auto insurance policies and phone coverage options to identify any lower-priced offers. And be sure to scrutinize the smaller expenses that are in your control such as entertainment, dining out and subscription services.

3. Always be prepared to adjust

Once you have an outline of your regular expenses, it’s important to recognize that those costs will evolve. Products and services will get more expensive more frequently than you will receive a pay increase, so you have to continually find a way to live within the confines of that net pay.

For example, if your car insurance gets more expensive, where will that money come from? You will need to cut back or reallocate funds from one spending category to another. And if you receive a raise, try to maintain the same spending levels so your savings can multiply.

4. Calculate the true cost of your debts

When you’re thinking about how to budget, you will need to manage the tug of war between repaying your existing debts and saving for tomorrow. However, all debts are not created equal. For example, for low-rate federal student loans, there is no rush to get that balance to zero. Make the minimum payments on time to build your credit, but you may be better off contributing remaining money to your 401(k), particularly if your employer provides a matching contribution.

For credit cards or personal loans with double-digit interest rates, it’s a different story. There is an urgency to paying this kind of debt off as quickly as possible.

5. Make budgeting a regular routine

Tracking your spending is not a one-time exercise. Just like any other part of your life where you want to excel, it needs to become a habit.

From entering your expenses in an old-school spreadsheet to downloading a budgeting app that can help you visualize your spending categories, there are plenty of ways to establish the routine. No matter how you revisit your budget, the thinking is simple: By keeping an eye on your spending and saving to hold yourself accountable, you can identify more opportunities to enhance your ability to save, repay debt and earn financial freedom.

How to budget on a low income

Thinking about a budget when you’re already feeling stretched thin can feel especially overwhelming. Start by thinking about small ways to shrink your spending, and remember that every tiny reduction can add up to a big difference. By making tough choices about your lifestyle now – eliminating spending at restaurants or canceling those streaming subscriptions, for example – you can put yourself on a pathway to better personal financial well-being. And when you get your next pay increase or land that dream job, you can celebrate the fact that you’re already in the smart routine of saving as much as possible.

Learn more: