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Budgeting 101: How to budget money

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Budgeting 101: How to budget money

Divide your earnings between needs, wants savings, and debt repayment, using this budget of 50/30/20.

By Bev O’Shea personal finance writer | MSN Money, Credit.com, Atlanta Journal-Constitution, Orlando Sentinel Bev O’Shea is a former NerdWallet authority on consumer credit, scams and identity theft. She holds a bachelor’s level degree in journalistic studies from Auburn University and a master’s in education from Georgia State University. Before coming to NerdWallet, she worked for the daily papers, MSN Money and Credit.com. Her work has appeared throughout the world in The New York Times, The Washington Post, the Los Angeles Times, MarketWatch, USA Today, MSN Money and many other places. Twitter: @BeverlyOShea.

And Lauren Schwahn Lead Writer | Personal financial Personal finance, credit Lauren Schwahn is a writer at NerdWallet who covers debt, budgeting and strategies for saving money. She contributes to the «Millennial Money» column of The Associated Press. The work she has contributed to was featured by USA Today, MarketWatch and more. Lauren has a bachelor’s level degree in the field of history at her home at the University of California, Santa Cruz. She is located within San Francisco.

Feb 7, 2023

The edit was done by Kirsten VerHaar, Senior Assigning Editor for eBay and Yahoo! Kirsten VerHaar edits for personal finance. She holds an English literature degree from the University of Colorado Boulder. In the past as a lead editor with eBay and was in charge of the writers team that produced coverage for eBay’s content team across the globe. She has also written for Yahoo. Since she joined NerdWallet at the beginning of 2015 she has written about topics as wide-ranging as vacuums (yes they really exist!), budgeting , and Black Friday.

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If I earn an amount of say $2,000 per month, how can I afford housing, food, insurance, health care, debt repayment and fun without running out of cash? It’s a lot of expenses to take care of in a short amount of money, which is why this game can be described as a zero sum game.

The best solution is to prepare a budget.

Budgeting is the strategy for each dollar you’ve got. It’s not magical but it does provide financial security and living with much less stress. This is how you can set up and then control your budget.

How do I budget my money?

Make a list of your monthly earnings and then choose a budgeting strategy and monitor your improvement.

Test the rule 50/30/20 for an easy .

Up to 50% of your income for needs.

Reserve 10% of your earnings to be used for needs.

You should commit at least 20% of the income to savings and debt repayment.

Track and by regular check-ins.

Learn about the budgeting process

Figure out your after-tax income If you receive regular pay then the amount you earn is probably it, but when you are able to take automatic deductions for a 401(k) or savings account and health and life insurance, you can add them back into your account to get a true view of your savings as well as expenditures. If you are earning other kinds of income, such as you make money from other jobs — you should take out anything that lowers the value of your income, such as business and tax expenses.

Make a plan for your budget The budget should cover all of your needs, certain desires and — and this is the most important aspect savings for emergency situations and for the future. Examples of this include envelopes as well as an all-zero budget.

Monitor your progress: Keep track of your expenditure or use .

Automate your savings: Automate whenever you can to ensure that the money you’ve allocated for specific goals is available with minimal exertion on your behalf. An accountability partner or online support group could be of assistance in holding you accountable for your actions that can blow the budget.

Manage your budget: Your spending habits changes in time, so you must actively monitor your budget by re-visiting it often, perhaps once a quarter. If you’re struggling to stick to your budget, consider these suggestions .

Before you create a budget, it is important to establish a plan.

NerdWallet breaks down your spending and helps you find ways to cut costs.

Frequently asked questions

How do you make an accounting spreadsheet?

Start by determining the amount of your home (net) income, and then keep track of your current expenditure. Then, follow the 50/30/20 principle: 50% of your necessities, 30% for wants and 20% toward savings and debt repayment.

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How do you keep your budget?

The most important thing to do is keep a budget is to regularly check it so that you have a clear view of where your money goes and the places you’d like it be going instead. Here’s how to get started:

1. Check your account statements and categorize your expenses.

2. Make sure your tracking is consistent.

3. Identify room for change. A free budget can help you budget more easily.

How do you come up with the budget?

Begin with a financial self-assessment. Once you know the state of your finances and what you want to accomplish, pick a that works for you. We recommend the 50/30/20 system that divides your earnings into three main categories 50 percent goes to necessities 30 percent goes to wants and 20% for savings and debt repayment.

You can try a budgeting method that is simple

We recommend the popular 50/30/20 budget to . It is a budget that allows you to spend approximately 50 percent of your tax-free dollars on essentials, but no over 30% for needs and at a minimum 20% on savings and debt repayment.

We like the simplicity of this plan. In the long run, someone who follows these guidelines will have a manageable debt, the ability to indulge on occasion, and savings to pay irregular or unexpected expenses , and then retire with ease.

The 50/30/20 budget

Find out how this method of budgeting applies to your finances.

Monthly after-tax income include your take-home pay and add back in any deductions made from your paycheck for health insurance, 401(k) contribution and any other savings that are automatic.

You have 50/30/20 in your numbers.

Necessities $0

Wants Zero

Savings and debt repayment — $0 Are you aware of your «want» areas?

Monitor your spending habits for the month to break down your needs and wants.

You can set aside up half of your income to meet your expenses

Your needs — about 50 percent of your after-tax earnings will include:

Groceries.

Housing.

Basic utilities.

Transportation.

Insurance.

Minimum loan payment. Anything over the minimum amount is put into saving and repayment categories.

Children’s care or any other expense you require to work.

If your essentials are over the 50% threshold it’s possible to dip to the «wants» section within your budget to last a while. It’s not an end-of-the-world scenario however you’ll need to make adjustments to your spending.

Even if your needs fall under the 50% cap Revisiting these fixed costs occasionally is smart. You might find chance to, or possibility to . That leaves you more to do with other.

Leave 30percent of the income to spend on wants

Sometimes, it can be challenging. However, in general, requirements are necessary to be able to live and work. Common needs include dining out, gifts, travel and entertainment.

It’s sometimes difficult to make a decision. Are restorative spa visits (including ) an option or a necessity? Are organic foods a good option? Individuals’ choices differ from individual.

If you’re determined to pay off your debt as quickly as you can, you might decide your wants can wait until you have some savings and your credit is in control. But your budget shouldn’t be so limited that you cannot purchase anything for pleasure.

Every budget requires some room for wiggle room. Perhaps you forgot about an expense or one was more expensive than you expected — and some money to spend however you like. If you don’t have money for fun and entertainment, you’ll find it harder to stick to your budget.

Make sure you dedicate 20% of your income to savings and debt repayment

Make use of 20% of your after-tax income to put something away to cover the unexpected, or put aside money for the near future, and repay your debt. Always think of the financial bigger picture this could mean that you have to switch between savings and debt repayment to meet your most pressing goals.

Priority No. 1 is a first-aid emergency fund.

Many experts suggest to put together a number of months of bare-bones living expenses. We recommend starting with at least $500 — sufficient to cover small emergencies as well as repairs, and then increase your budget from there.

You can’t get out of debt without a way to not incur more debt each when something unexpected happens. And you’ll sleep better knowing you have an insurance policy for your finances.

Priority No. 2 is getting the employer match for your 401(k).

First, you need to get the money that is easy. Most people includes tax-deductible accounts like a 401(k). If your employer offers matches, you must contribute at least enough to reach the maximum. The match is of no cost.

Why is it that we give capturing an employer match a higher priority than debts? Because you won’t get another chance this big at tax-free money, free cash and compound interest. Ultimately, you are more likely to succeed in creating wealth by getting into the habit of regular long-term savings.

There’s no second chance to make the . Each $1,000 you don’t put aside when you’re in your 20s could be $20,000 less you have .

Priority No. 3 is a toxic debt.

Once you’ve snagged an investment match for the 401(k), if you’re able, tackle the debt that is toxic in your life such as high-interest credit card debt, personal and payday loans, title loans and rent-to-own payments. These all have interest rates that are such that you’ll will be paying back twice or three times the amount you borrowed.

If any of the following situations applies to you, consider options for , which can include bankruptcy or :

You’re not able to pay back the debt you don’t have to pay — credit cards medical bills or loans for personal loans — in the next five years, even after severe budget cuts.

Your total debt is half or greater of gross income.

Priority No. 4 is, as always, saving to retire.

After you’ve cleared any toxic debt Next step is to get your retirement plan on track. Make sure you save 15% of your gross income, which includes the company match in the event that one exists.

If you’re young, think about when you’ve gotten the match from your employer. When you’ve reached the contribution limit on the IRA then go back the 401(k) to 401(k) and increase your contributions there.

Priority No. 5 is, once again, your emergency fund.

Regular contributions will help you accumulate the equivalent of three or six months’ worth of expenses for living. It isn’t advisable to expect constant progress because emergencies happen, and it is at this point that you need to withdraw funds from this account. Focus on replacing what you’ve used and increasing your use over time.

Priority No. 6 is debt repayment.

These are payments beyond the minimum amount required .

If you’ve already paid off your most toxic debt, what’s left is probably lower-rate, taxpayer-funded debt (such like the mortgage). Consider these to be dealt with when the primary objectives listed above are met.

Any wiggle room you have here comes from the money available for desires or saving for your needs and not from your emergency fund or retirement funds.

Priority No. 7 is yours.

Congratulations! You’re in a great situation — really excellent position in the event that you’ve created an emergency fund, paid off excessive debt and are stashing away 15% toward a retirement nest fund. You’ve established a routine of saving which gives you immense financial flexibility. Don’t quit now.

Consider saving for irregular expenses that aren’t emergencies for example, an upgrade to your roof or your next car. The costs will be there no matter what, and it’s more beneficial to save for these expenses rather than borrowing.

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Authors’ Bios Bev O’Shea was a credit editor at NerdWallet. Her work has been featured in publications such as the New York Times, Washington Post, MarketWatch and elsewhere.

Lauren Schwahn covers consumer credit and debt for NerdWallet. Her work has been featured in USA Today and The Associated Press.

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