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If I have take-home pay of, say, $3,000 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.
The answer is to make a budget.
What is a budget? 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. Here’s how to set up and then manage your budget.
How to budget money
Calculate your monthly income, pick a budgeting method and monitor your progress.
Try the 50/30/20 rule as a simple budgeting framework.
Allow up to 50% of your income for needs.
Leave 30% of your income for wants.
Commit 20% of your income to savings and debt repayment.
Track and manage your budget through regular check-ins.
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Understand the budgeting process
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.
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. Budgeting plan examples include the envelope system and the zero-based budget.
Track your progress: Record your spending or use online budgeting and savings tools.
Automate your savings: 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.
Practice budget management: Your income, expenses and priorities will change over time, so actively manage your budget by revisiting it regularly, perhaps once a quarter. If you're struggling to stick with your plan, try these budgeting tips.
Before you build a budget
NerdWallet breaks down your spending and shows you ways to save.
Frequently asked questions
How do you make a budget spreadsheet?
Start by determining your take-home (net) income, then take a pulse on your current spending. Finally, apply the 50/30/20 budget principles: 50% toward needs, 30% toward wants and 20% toward savings and debt repayment.
How do you keep a budget?
The key to keeping a budget is to track your spending on a regular basis so you can get an accurate picture of where your money is going and where you’d like it to go instead. Here’s how to get started: 1. Check your account statements. 2. Categorize your expenses. 3. Keep your tracking consistent. 4. Explore other options. 5. Identify room for change. Free online spreadsheets and templates can make budgeting easier.
How do you figure out a budget?
Start with a financial self-assessment. Once you know where you stand and what you hope to accomplish, pick a budgeting system that works for you. We recommend the 50/30/20 system, which splits your income across three major categories: 50% goes to necessities, 30% to wants and 20% to savings and debt repayment.
Try a simple budgeting plan
We recommend the popular 50/30/20 budget to maximize your money. In it, 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.
The 50/30/20 budget
Find out how this budgeting approach applies to your money.
Your 50/30/20 numbers:
Necessities
$0
Wants
$0
Savings and debt repayment
$0
Do you know your “want” categories?
Become a NerdWallet member to track your monthly spending trends, including how much you're allocating to needs and wants.
Allow up to 50% of your income for needs
Your needs — about 50% of your after-tax income — should include:
Groceries.
Housing.
See AlsoHow To Create A BudgetBasic utilities.
Transportation.
Insurance.
Minimum loan payments. Anything beyond the minimum goes into the savings and debt repayment category.
Child care or other expenses you need so you can work.
If your absolute essentials overshoot the 50% mark, you may need to dip into the “wants” portion of your budget for a while. It’s not the end of the world, but you'll have to adjust your spending.
Even if your necessities fall under the 50% cap, revisiting these fixed expenses occasionally is smart. You may find a better cell phone plan, an opportunity to refinance your mortgage or an opportunity for less expensive car insurance. That leaves you more to work with elsewhere.
Leave 30% of your income for wants
Separating wants from needs can be difficult. In general, though, needs are essential for you to live and work. Typical wants include dinners out, gifts, travel and entertainment.
It’s not always easy to decide. Are restorative spa visits (including tips for a massage) a want or a need? How about organic groceries? Decisions vary from person to person.
If you're eager to get out of debt as fast as you can, you may decide your wants can wait until you have some savings or your debts are under control. But your budget shouldn't be so austere that you can never buy anything just for fun.
Every budget needs wiggle room — maybe you forgot about an expense or one was bigger than you anticipated — and some money to spend as you wish. If there's no money for fun, you'll be less likely to stick with your budget.
Commit 20% of your income to savings and debt repayment
Use 20% of your after-tax income to put something away for the unexpected, save for the future and pay off debt. Make sure you think of the bigger financial picture; that may mean two-stepping between savings and debt repayment to accomplish your most pressing goals.
A smart view of your financial health
Get a quick read on how you’re set up to meet expenses and money goals.
Priority No. 1 is a starter emergency fund.
Many experts recommend you try to build up several months of bare-bones living expenses. We suggest you start with an emergency fund of at least $500 — enough to cover small emergencies and repairs — and build from there.
You can’t get out of debt without a way to avoid more debt every time something unexpected happens. And you’ll sleep better knowing you have a financial cushion.
Priority No. 2 is getting the employer match on your 401(k).
Get the easy money first. For most people, that means tax-advantaged accounts such as a 401(k). If your employer offers a match, contribute at least enough to grab the maximum. It's free money.
Why do we make capturing an employer match a higher priority than debts? Because you won’t get another chance this big at free money, tax breaks and compound interest. Ultimately, you have a better shot at building wealth by getting in the habit of regular long-term savings.
You don’t get a second chance at capturing the power of compound interest. Every $1,000 you don’t put away when you’re in your 20s could be $20,000 less you have at retirement.
Priority No. 3 is toxic debt.
Once you’ve snagged a match on a 401(k), if available, go after the toxic debt in your life: high-interest credit card debt, personal and payday loans, title loans and rent-to-own payments. All carry interest rates so high that you end up repaying two or three times what you borrowed.
If either of the following situations applies to you, investigate options for debt relief, which can include bankruptcy or debt management plans:
You can't repay your unsecured debt — credit cards, medical bills, personal loans — within five years, even with drastic spending cuts.
Your total unsecured debt equals half or more of your gross income.
Priority No. 4 is, again, saving for retirement.
Once you’ve knocked off any toxic debt, the next task is to get yourself on track for retirement. Aim to save 15% of your gross income; that includes your company match, if there is one.
If you’re young, consider funding a Roth individual retirement account after you capture the company match. Once you hit the contribution limit on the IRA, return to your 401(k) and maximize your contribution there.
Priority No. 5 is, again, your emergency fund.
Regular contributions can help you build up three to six months' worth of essential living expenses — not your full budget, just the must-pay basics. You shouldn’t expect steady progress because emergencies happen, and that's when you should pull money from this fund. Just focus on replacing what you use and building higher over time.
Priority No. 6 is debt repayment.
These are payments beyond the minimum required to pay off your remaining debt.
If you’ve already paid off your most toxic debt, what’s left is probably lower-rate, often tax-deductible debt (such as your mortgage). Tackle these when the more-basic goals listed above are covered.
Any wiggle room you have here comes from the money available for wants or from saving on your necessities, not your emergency fund and retirement savings.
Priority No. 7 is you.
Congratulations! You’re in a great position — a really great position — if you’ve built an emergency fund, paid off toxic debt and are socking away 15% toward a retirement nest egg. You’ve built a habit of saving that gives you immense financial flexibility. Don’t give up now.
Consider saving for irregular expenses that aren’t emergencies, such as a new roof or your next car. Those expenses will come no matter what, and it’s better to save for them than borrow.
WATCH TO LEARN MORE ABOUT BUDGETING
» LEARN: Tips for Canadians on how to budget
As a personal finance expert with a deep understanding of budgeting principles, I can confidently guide you through the concepts discussed in the article. My expertise is rooted in years of experience and a comprehensive knowledge of financial management strategies.
The article emphasizes the importance of creating a budget to effectively manage limited financial resources. A budget, as described, is a plan for allocating every dollar, providing financial freedom, and reducing stress. Let's break down the key concepts discussed in the article:
-
Calculate Your Monthly Income:
- Determine your after-tax income, considering automatic deductions like 401(k), savings, and insurance.
- Include other income sources, such as side gigs, while subtracting applicable taxes and business expenses.
-
Choose a Budgeting Method:
- The article suggests using the 50/30/20 rule, a popular budgeting framework.
- Allocate 50% of your income to needs, 30% to wants, and reserve 20% for savings and debt repayment.
-
Track and Manage Your Budget:
- Regularly check and record your spending.
- Utilize online budgeting tools or support groups to stay accountable.
- Automate savings to ensure allocated funds reach their intended purpose effortlessly.
-
Understand the Budgeting Process:
- Perform a financial self-assessment to determine your current financial standing and goals.
- Choose a budgeting system that aligns with your objectives, with the recommended 50/30/20 system.
-
Prioritize Emergency Fund:
- Build an emergency fund as Priority No. 1, aiming for at least $500 initially.
- This fund serves as a financial cushion for unexpected expenses, preventing the need for additional debt.
-
Maximize Employer Match on 401(k):
- Contribute to a 401(k) to capture the employer match, considering it as "easy money."
- Prioritize this step over paying off certain debts due to the long-term benefits of compound interest and tax advantages.
-
Address Toxic Debt:
- After securing the employer match, focus on high-interest debt like credit cards, payday loans, and rent-to-own payments.
- Consider debt relief options if necessary, such as bankruptcy or debt management plans.
-
Save for Retirement:
- Aim to save 15% of your gross income for retirement, including any company match.
- Consider contributing to a Roth IRA, especially if you're young and have captured the company match.
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Rebuild Emergency Fund:
- Regularly contribute to your emergency fund to cover three to six months' worth of essential living expenses.
- Prioritize replenishing this fund after any withdrawals due to emergencies.
-
Debt Repayment:
- Address remaining debt, focusing on lower-rate, tax-deductible debt (e.g., mortgage) after toxic debt is paid off.
- Use any available wiggle room from wants or savings on necessities for debt repayment.
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Invest in Yourself:
- Once you've achieved financial milestones, continue saving and consider planning for irregular expenses like home repairs or vehicle replacement.
By following these steps, individuals can achieve financial flexibility, manage debt effectively, and work towards long-term financial goals. If you have further questions or need personalized advice, feel free to ask.
