Creating and Using a Budget

Creating and using a budget is something everyone can benefit from and do. Budgeting is a
powerful process that can help you develop a financial plan and build financial capability and
empowerment.

What is your perspective on budgeting?

Your success with budgeting may depend on your perspective. Some think budgets are meant to
be restrictive, take the fun out of life, and make you feel shameful about spending. Others may
view budgets as too time consuming to make or too difficult to follow.
In reality, budgeting is an empowering process. It puts you in control of directing your money
towards what you really want in life, including having fun. With this in mind, taking the time to
create a realistic budget you can follow will be well worth it.

What is a budget? What is the budgeting process?

A budget is a written plan for how you will spend and save your income each month. Budgeting
includes:

1. Identifying your priorities and goals

2. Creating a budget document that outlines your estimated monthly income and expenses
3. Tracking your actual spending and income
4. Making adjustments to the plan

Why budget? Budgeting helps to:

 Put you in control of your money and ensure it is being used to meet your needs and
achieve your goals
 Show you where your money is going and reduce wasteful spending
 Improve your ability to pay all of your bills and not run out of money during the month
 Free up money to pay down debt
 Save for things you really want
 Reduce stress and build confidence
 Better prepare for emergencies

Five simple steps to create and use a budget

Creating and using a budget can be simple. Follow these steps to build and use a budget that
works for you. This budget tool may be useful in creating your budget.

Step 1: Estimate your monthly income

List your sources of income and how much you expect to receive on a monthly basis. Income
sources may include your paychecks, child support, pay from gig work, Social Security income,
etc. If your paycheck amounts differ each period, estimate conservatively to set yourself up for
success. Let's use an example:

Income

Paycheck 1 $1,500

Paycheck 2 $1,500

Total estimated
$3,000
monthly income

Step 2: Identify and estimate your monthly expenses

What do you spend your money on? Start by estimating your fixed expenses, which are those
that are the same amount each month. Your rent or mortgage, cell phone bill, and garbage bill
may be examples of fixed expenses. List each expense and how much it costs. Next, identify
your variable expenses, which are those with different dollar amounts each month. Groceries,
eating out, gifts, clothes, and gas are examples of these types of expenses. Estimate how much
you spend on these each month. Looking at past credit card or bank statements can help you to
accurately estimate amounts. Don't forget to budget for expenses you may pay annually. To
budget for these, divide the expense by 12, then put aside that amount each month. When
finished, calculate your total estimated monthly expenses. See the example below.

Expenses

Fixed Expenses

Rent $1,400

Cell phone $100

Garbage $50
 Car Insurance $200

Variable Expenses

Groceries $400

Eating out $100

Clothes $100

Gas $200

Gifts $150

Total estimated expenses $2,700

Step 3: Compare your total estimated income and expenses, and consider your priorities
and goals
Now, compare your total estimated income to your total estimated expenses. If your expected
monthly income is greater than your expected monthly expenses, you expect a surplus. That's
great! In the example above, the person expects to receive $3,000 and spend $2,700 each month.
There is an expected surplus of $300 per month.
This is a good time to discuss financial priorities and goals. What are the things you want to
achieve with money – to save or invest for? Budgeting is exciting when you are able to
maximize the amount you direct towards your goals and can see yourself making progress.
Short-term goals to save for may include building an emergency fund or saving for a vacation.
Long-term goals may include saving for a home or investing for retirement.
Once you have determined your goals and priorities, consider how much you will direct to those
goals on a monthly basis. In the example above, the person decides to save $100 each month to
add to an emergency fund. The person also chooses to contribute $200 a month to an investment
account. Ideally, work to save and invest 10 percent to 20 percent of your monthly income. In the
example, the person is planning to save/invest 10 percent a month ($300/$3,000 = 10 percent).
 If you expect your expenses to be greater than your income, you expect a deficit. To address this,
you will either need to reduce your estimated expenses or increase your expected income. Make
decisions that will bring your budget into balance. For example, can you find a way to spend less
on groceries or entertainment each month? Or, can you get a second job to earn more money?

Step 4: Track your spending, and at the end of month, see if you spent what you planned
Devise a system to record your spending for the month to see if you are staying within your
budget. At the end of the month, use the data to adjust your budget or adjust your future
spending. Did you have spending leaks you did not account for? Do you need to create a new
budget category? Do you need to adjust the amount you budget for certain expenses? Do you
need to cut back on some expenses? Did you meet your savings goals?
Budgets should be adjusted over time. Ask yourself, “Am I spending and saving my money in
the way I truly want to?" “Am I meeting my needs and working to achieve my goals?" If you
have more unspent money on a monthly basis, consider how to adjust your budget to redirect this
money to achieve more goals or to achieve goals sooner than expected.

Step 5: Stick with it

Tracking spending, plugging spending leaks, adjusting your budget, and saving money becomes
a habit over time. Set yourself up for success by:

1. Setting realistic and achievable expectations and goals

2. Creating a budget and tracking system that is easy to use and maintain
3. Automating saving and investing by setting up recurring transfers to savings or
investment accounts
4. Using strategies to reduce impulse purchases and build self-discipline

As you practice, build habits, make adjustments, and start seeing results, you will be more
empowered to reach your goals.
Identifying irregular expenditures in personal finance involves tracking and categorizing
expenses that don't occur on a regular monthly basis, such as seasonal purchases, unexpected
repairs, or one-time events. This process helps understand where your money goes, identify
potential overspending areas, and build a more accurate budget.
Here's a more detailed approach:
1. Track your expenses:
 Monthly Statements: Review your bank and credit card statements to identify all transactions.
 Expense Tracking Apps/Spreadsheets: Use budgeting or expense-tracking tools to categorize
your spending.
 Categorize your expenses: Group your expenses into categories like housing, food,
transportation, utilities, entertainment, etc., and then identify which fall into the
irregular/seasonal category.
2. Identify irregular expenses:
  Non-Recurring Expenses: Recognize one-time or infrequent expenses like legal fees,
equipment maintenance, or large purchases.
 Seasonal Expenses: Account for expenses tied to specific seasons or holidays, like Christmas
gifts or summer travel.
 Emergency/Unexpected Expenses: Consider repairs, unexpected bills, or other unforeseen
costs.
3. Budgeting for Irregular Expenses:
 Build a budget that includes these expenses:
Allocate a portion of your income to cover anticipated irregular expenses.
 Estimate and allocate:
Determine the expected cost for each irregular expense and allocate funds accordingly.
 Consider a buffer:
Add a percentage (e.g., 10%) to your budget for unexpected costs, says Home Credit.
 Use savings or credit:
Have a savings account or a credit card readily available to cover unexpected expenses, says
NerdWallet.
4. Regularly review and adjust:
 Track actual vs. budgeted: Compare your actual spending with your budgeted amount to see
where you're overspending or underspending.
 Make adjustments: Adjust your budget based on your spending patterns and financial goals.

What is an emergency fund?

An emergency fund is a cash reserve that’s specifically set aside for unplanned expenses or
financial emergencies. Some common examples include car repairs, home repairs, medical bills,
or a loss of income.

In general, emergency savings can be used for large or small unplanned bills or payments that
are not part of your routine monthly expenses and spending.

Why do I need it?

Without savings, a financial shock—even minor—could set you back, and if it turns into debt, it
can potentially have a lasting impact.

Research suggests that individuals who struggle to recover from a financial shock have less
savings to help protect against a future emergency. They may rely on credit cards or loans, which
can lead to debt that’s generally harder to pay off. They may also pull from other savings, like
retirement funds, to cover these costs.
Get a sense of your financial well-being

How much do I need in it?

The amount you need to have in an emergency savings fund depends on your situation. Think
about the most common kind of unexpected expenses you’ve had in the past and how much they
cost. This may help you set a goal for how much you want to have set aside.

If you’re living paycheck to paycheck or don’t get paid the same amount each week or month,
putting any money aside can feel difficult. But, even a small amount can provide some financial
security.

Keep reading to find the savings strategy, or strategies, that work best for you.

How do I build it?

There are different strategies to get your savings started. These strategies cover a range of
situations, including if you have a limited ability to save or if your pay tends to fluctuate. It may
be that you could use all of these strategies, but if you have a limited ability to save, managing
your cash flow or putting away a portion of your tax refund are the easiest ways to get started.

Strategy: Create a savings habit

Building a savings of any size is easier when you’re able to consistently put money away. It’s
one of the fastest ways to see it grow. If you’re not in a regular practice of saving, there are a few
key principles to creating and sticking to a savings habit:

 Set a goal. Having a specific goal for your savings can help you stay motivated.
Establishing your emergency fund may be that achievable goal that helps you stay on
track, especially when you’re initially getting started. Use our savings planning tool to
calculate how long it’ll take you to reach your goal, based on how much and how often
you’re able to put money away.
 Create a system for making consistent contributions. There are a number of different
ways to save, and as you’ll read below, setting up automatic recurring transfers is often
one of the easiest. It may also be that you put a specific amount of cash aside each day,
week, or payday period. Aim to make it a specific amount, and if you can occasionally
afford to do more, you’ll watch your savings grow even faster.
 Regularly monitor your progress. Find a way to regularly check your savings. Whether
it’s an automatic notification of your account balance or writing down a running total of
your contributions, finding a way to watch your progress can offer gratification and
encouragement to keep going.
  Celebrate your successes. If you’re sticking with your savings habit, don’t miss the
opportunity to recognize what you’ve accomplished. Find a few ways that you can treat
yourself, and if you’ve reached your goal, set your next one.
Who is this helpful for: Anyone, but particularly those with consistent income. If you know you
have a regular paycheck or money consistently coming in, you can create a habit to put some of
that money towards an emergency savings fund.

Strategy: Manage your cash flow

Your cash flow is essentially the timing of when your money is coming in (your income) and
going out (your expenses and spending). If the timing is off, you can find yourself running short
at the end of the week or month, but if you’re actively tracking it, you’ll start to see opportunities
to adjust your spending and savings .

For example, you may be able to work with your creditors (like your landlord, utility companies,
or credit card companies) to adjust the due dates for your bills, or you can use the weeks when
you have more money available to move a little extra into savings.

Who is this helpful for: Anyone. This is one important first step in managing your money,
regardless of whether you’re living paycheck to paycheck or have a tendency to spend more than
your budget allows.

Strategy: Take advantage of one-time opportunities to save

There may also be certain times during the year when you get an influx of money. For many
Americans, a tax refund can be one of the largest checks they receive all year. There may be
other times of the year, like a holiday or birthday, that you receive a cash gift.

While it’s tempting to spend it, saving all or a portion of that money could help you quickly set
up your emergency fund.

Who is this helpful for: Anyone but particularly those with irregular income. If you receive a
large check from a tax refund or for some other reason, it’s always good to consider putting all or
a portion of it away into savings

Strategy: Make your saving automatic

Saving automatically is one of the easiest ways to make your savings consistent so you start to
see it build over time. One common way to do this is to set up recurring transfers through your
bank or credit union so money is moved automatically from your checking account to your
savings account. You get to decide how much and how often, but once you have it set up, you’ll
be making consistent contributions to your savings.
It’s a good idea to be mindful of your balances, however, so you don’t incur overdraft fees if
there’s not enough money in your checking account at the time of the automatic transaction. To
help you stay mindful, consider setting up automatic notifications or calendar reminders to check
your balance.

Who is this helpful for: Anyone, but particularly those with consistent income. Again, you can
determine how much and how often to have money transferred between accounts, but you want
to make sure you have money coming in. If your situation changes or your income changes, you
can always adjust it.

Strategy: Save through work

Another way to save automatically is through your employer. In addition to employer-based
contributions for retirement, you may have an option to split your paycheck between your
checking and savings accounts. If you receive your paycheck through direct deposit, check with
your employer to see if it’s possible to divide it between two accounts. If you’re tempted to
spend your paycheck when you get it, this is an easy way to put money aside without having to
think twice.

Who is this helpful for: Those with consistent income. Again, if you’re getting a check from
your employer on a regular basis, pay yourself first by putting a portion of it automatically into
savings.

Where should I keep it?

Where you put your emergency fund depends on your situation. You want to make sure this fund
is safe, accessible, and in a place where you’re not tempted to spend it on non-emergencies.

Here are a few options for where to put your emergency savings, and you can choose the one that
makes the most sense for you:

 Bank or credit union account — If you have an account with a bank or credit union—
generally considered one of the safest places to put your money—it might make sense to
have a dedicated account where you can keep and maintain these funds.
 Prepaid card — A prepaid card is a card that you can load money onto. It’s not
connected with a bank or credit union, and you can only spend the amount that’s on your
card.
 Cash — Another option is keeping money on hand for emergencies, either in your home
or with a trusted family member or friend. Keep in mind that cash can be stolen, lost, or
destroyed.

When should I use it?

Set some guidelines for yourself on what constitutes an emergency or unplanned expense. Not
every unexpected expense is a dire emergency but try to stay consistent. Even if it’s not a trip to
the emergency room, you may need it to pay for a medical bill that wasn’t covered by insurance.

Having a reserve fund for financial shocks can help you avoid relying on other forms of credit or
loans that can turn into debt. If you use a credit card or take out a loan to pay for these expenses,
your one-time emergency expense may grow significantly larger than your original bill because
of interest and fees.

However, don’t be afraid to use it if you need it. If you spend down what’s in your emergency
savings, just work to build it up again. Practicing your savings skills over time will make this
easier.
Using a budget can help you save money, pay off debt and work toward building financial
stability. But making a budget that's effective can be difficult if you don't have a blueprint.

The best budget is one you can stick with, and what works well for one budgeter may not click
for someone else. To find your best fit, check out these five budget plans. Each takes a different
approach to budgeting, but all share the common goal of helping you reach your financial goals.

1. 50/30/20 Plan

One of the most popular budget methods is the 50/30/20 spending plan. With this budget, there
are only three spending categories you'll need to keep track of:

 50% of your net income goes to needs: This is the spending that includes basic, non-
negotiable expenses. For example, your housing payment, bills, basic groceries and
hygiene products, transportation to and from work and the like.

 30% of your net income goes to discretionary spending: This is the lifestyle
spending you do because you want to—like shopping, dining and anything from that
brand new tech you've been eyeing to tickets to see your favorite band.

 20% of your net income goes to financial goals: This category includes money you put
into a savings account, use to pay off debt or invest.

Of course, you can always tweak your ratios to better meet your current financial situation and
goals. For example, if you have a lot of debt or a small emergency fund, it may make sense to
put more than 20% of your budget toward those goals and dial back your discretionary spending.

To make this budget work for you, consider opening a savings account specifically for your
financial goals. Then, set up automatic transfers into that account based on your budget plan. For
example, if you take home $1,000 a week and want to put 20% toward your goals, you could set
up a $200 weekly transfer into savings.

2. Envelope System (AKA Cash Stuffing)

The envelope system is an old-fashioned approach to budgeting that typically relies on cash in
physical envelopes. It's also frequently called "cash stuffing"—especially on social media, where
it's popular for its effectiveness at reining in impulse spending.

You'll start by determining how much you typically spend (or how much you'd prefer to spend)
in different categories, such as rent, groceries and entertainment. Once you've determined an
appropriate amount for your spending in each category, you'll label an envelope for each one and
put the corresponding amount of cash in the envelope.

Once you've used up all the cash in an envelope, you won't be able to spend any more money in
that category unless you pull cash from another envelope. Budgets are intended to keep you
disciplined, however, and continually moving around money could have a domino effect that
impacts expenses you can't afford to cut back on.

Also, keep in mind that you may not be able to make some payments in cash. While you don't
need to set aside an envelope for these bills, you'll still need to account for them as you
determine how much to allocate for other spending categories.

Who Should Use an Envelope Budget?

The envelope budgeting system can be a good idea for someone who prefers to use cash and
wants to be strict with how they manage their money. If you're not a cash user but like the sound
of this method, some budget apps are designed to offer a digital experience similar to old-school
envelope budgeting. One such app is Goodbudget, which has you manually allot your income to
different spending "envelopes," but doesn't require you to become a regular at your local ATM.

3. Zero-Based Budget

The zero-based budgeting method works similarly to the envelope system but with a couple of
key differences. First, you don't have to use envelopes to keep track of your money, and second,
you're not restricted to using cash.

The main concept behind a zero-based budget is that you give every dollar you earn a purpose—
in the end, your monthly expenses should equal your monthly income. But this doesn't mean
you're supposed to spend every dime that comes in every month. In fact, this approach is all
about being meticulous with where your money goes.

You'll likely have a lot of spending categories to plan for and keep track of, and a plan for what
to do with any money that's left over (put it in your savings, for instance). If you overspend in
one category, you'll need to stop spending in that area until the next month or take from another
category.

Who Should Use a Zero-Based Budget?

A zero-based budget is a good option for someone looking for a detailed approach to managing
their money who wants to know exactly where all of their money goes. This approach can also
be good for someone who prefers to use credit cards. You're less likely to overdraw your
checking account when you've budgeted every dollar to the penny.

If you're considering giving zero-based budgeting a trial run, consider an app designed
specifically for the task. For example, You Need a Budget (YNAB) allows you to create
categories for everything and links to your financial accounts to help you track important
transactions.

When you get paid, those dollars are represented in your YNAB dashboard, where you'll allocate
every cent to its own spending categories. If you go over in one category, YNAB will show you
that you're in the red, giving you the chance to move money from a different category to make up
the difference.

4. Pay-Yourself-First Budget

Also sometimes called reverse budgeting, this approach prioritizes making sure your savings and
debt goals are met. When you get your paycheck, you'll set aside money for those goals—in
other words, you'll pay yourself first. After that, you can use the remaining money for whatever
you want.

Of course, you'll need to account for recurring expenses like rent or mortgage payments, utilities
and other bills. Once your priorities are handled, you'll know what you have left over for the fun
stuff. The idea with this budgeting method is that you don't have to keep track of exactly where
your money goes, just that you don't run out of it.

Who Should Use a Pay-Yourself-First Budget?

The pay-yourself-first budget is best suited for someone who doesn't want a complicated
budgeting process. It's also best to avoid credit cards with this approach because they don't give
you an accurate view of how much money you actually have to spend in your checking account.

5. The No-Budget Budget

A "no-budget" budget system is a flexible spending plan where you take two things into account:

 Your net pay for the month

 Your "must pays" for the month

From there, all this method has you do is keep your spending low enough that you don't eat into
the money you need to keep earmarked for all your "must pays." That broad category of
spending includes everything from the rent for your home to the gas in your car to the basic food
in your fridge.

Outside of that, everything left is essentially disposable income. You don't need to worry about
tracking where that money goes—just as long as you've already taken care of your non-
negotiables.
In practice, this can look a lot like the pay-yourself-first budget. You'll set up automatic transfers
into savings right when you get paid. That way, you'll have an accurate picture of what's left in
your account. You might also find it useful to set up a second checking account where you'll
house money for all your expenses and set up autopay so that your bill payments come out of
that account.

Once you've met your goals and ensured you can pay your bills, your only other rule is to ensure
you don't overdraw your bank account.

Who Should Use a No-Budget Budget?

Naturally, if you are not a fan of budgeting, but do want to ensure you're building financial
health and avoiding overspending, a no-budget approach to budgeting could be what sticks.

There are pitfalls you'll need to watch out for, though—especially overspending. For that reason,
this budget may work well for you if you tend to have a fairly easy time living within your
means, and if you're alright with using debit (rather than credit) to do the bulk of your spending.

Also, keep in mind that the no-budget method could be trickier to make work if you
have irregular income, because you won't have the opportunity to fall into a natural rhythm of
spending.

How to Stick to Your Budget

Creating a budget is an important first step, but it won't accomplish much if you don't stick to
your budget. Here are some tips that can help you stay motivated and on track:

 Choose a budgeting method that works for you. Do your homework and take a second
to think critically before settling on a budgeting method. Instead of simply going with the
one you think can save you the most money, think about which budget method fits you
the most. If a budgeting method sounds like pure drudgery to you, it's unlikely you'll stick
to it. Choose one you expect to bring you some satisfaction.

 Track spending. Review your transactions at least once a week to keep track of whether
you're spending within your budget. This can help you make adjustments throughout the
month if need be to avoid overspending.

 Use a budgeting app. There are several budgeting apps that can help you keep track of
your budget. Some of them even directly import your transactions from all of your
financial accounts into one place, making it easier to keep track of your expenses. Having
a budget process that's convenient will make you more likely to succeed.

 Evaluate your budget regularly. Every six months to a year, take a look at your
budgeting approach and determine whether it's still working for you. If it's not, you may
need to rework your budget to better align your goals with reality. In some cases, it may
even make sense to switch to an entirely different budgeting approach.
  Keep your goals in sight. It can take time to master a budget, and even then, it can be
challenging to stay motivated. Keep a vision board or list of reasons why you're
budgeting. It may be that you want to save money to start a business, take your family on
vacation or retire at a certain age. Whatever it is, keeping your goals in mind can help
you stay motivated.

How Budgeting Can Improve Your Finances

A budget is one of the simplest elements of a financial plan, but it also provides a solid
foundation for financial success.

The greatest resource a budget provides is information. Understanding exactly where your
money goes can help you change how you spend so that you're more likely to achieve your
financial goals.

For example, if you want to start making extra debt payments or put more money in
your emergency fund, all you have to do is look at your budget to determine which expenses to
cut back on and how to reallocate that money toward your objective.

Building Credit Can Help Your Budgeting

Having a good credit score can do wonders for your budget because it can help you qualify for
lower-cost credit. Whether it's a mortgage loan, auto loan, student loan or whatever else, getting
low interest rates with good credit allows you to save money that you can put to good work
elsewhere in your budget.

Take some time to work on building your credit score. You should monitor your credit regularly
to understand which areas you can address, and keep track of your progress. As your credit
improves, you may be able to refinance existing debts and qualify for new loans when you need
them and save in the process.