If you want to control your spending and work towards your financial goals, you need a budget. A personal or household budget is a summary that compares and tracks your income and expenses for a defined period, typically one month.

While the word “budget” is often associated with restricted spending, a budget does not have to be restrictive to be effective. A budget will show you how much money you expect to bring in, then compare that to your required expenses—such as rent and insurance—and your discretionary spending, such as entertainment or eating out.

Instead of viewing a budget as a negative, you can view it as a tool for achieving your financial goals. The focus of this article will be on helping you make a budget and the benefits that comes with budgeting for personal finance.

• How Does a Budget Help You
• How Can You Make a Personal Budget?
• How Can You Use Your Budget For Personal Finance
• 7 Budget Tips For Personal Finance
• What Is the 50/20/30 Budget Rule And How Does it Work?
• What is Included in a Personal Budget?
• How Much Money Should You Budget For Fun?
• What Are The 3 Golden Rules of Money Management
• How should a beginner budget?

How Does a Budget Help You

A written, monthly budget is a financial planning tool that allows you to plan how much you will spend or save each month. It also allows you to track your spending habits.

Though making a budget may not sound like the most exciting activity (and for some, it’s downright scary), it’s an important part of keeping your financial house in order. That’s because budgets rely on balance.

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If you spend less in one area, you can spend more in another, save that money for a large purchase, build a “rainy day” fund, increase your savings, or invest in building wealth.

A budget only works if you are honest about both your income and expenses. To make an effective budget, you must be willing to work with detailed and accurate information about your earning and spending habits.

Ultimately, the result of your new budget will show you where your money is coming from, how much is there, and where it all goes each month.

How Can You Make a Personal Budget?

List Out All Your 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. If you are self-employed or have outside sources of income, such as child support or Social Security, include these as well. Record this total income as a monthly amount.

Create a List of Monthly Expenses

Write down a list of all the expenses you expect to have during a month. This list could include:

• Mortgage payments or rent
• Car payments
• Insurance
• Groceries
• Utilities
• Entertainment
• Personal care
• Eating out
• Childcare
• Transportation costs
• Travel
• Student loans
• Savings

Use your bank statements, receipts, and credit card statements from the last three months to identify all your spending.

Determine Fixed and Variable Expenses

Fixed expenses are those mandatory expenses that you pay the same amount for each time. Include items like mortgage or rent payments, car payments, set-fee internet service, trash pickup, and regular childcare.

If you pay a standard credit card payment, include that amount and any other essential spending that tends to stay the same from month to month.

If you plan to save a fixed amount or pay off a certain amount of debt each month, also include savings and debt repayment as fixed expenses. 

Variable expenses are the type that will change from month to month, such as:

• Groceries
• Gasoline
• Entertainment
• Eating out
• Gifts

If you don’t have an emergency fund, include a category for “surprise expenses” that might pop up over the month and derail your budget.

Start assigning a spending value to each category, beginning with your fixed expenses. Then, estimate how much you’ll need to spend per month on variable expenses.

If you’re not sure how much you spend in each category, review your last two or three months of credit card or bank transactions to make a rough estimate.

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.

Total Your Monthly Income and Expenses

If your income is higher than your expenses, you are off to a good start. This extra money means you can put funds towards areas of your budget, such as retirement savings or paying off debt.

If you have more income than expenses, consider adopting the “50-30-20” budgeting philosophy. In a 50-30-20 budget, “needs,” or essential expenses, should represent half of your budget, wants should make up another 30%, and savings and debt repayment should make up the final 20% of your budget.

If your expenses are more than your income, that means you are overspending and need to make some changes.

Make Adjustments to Expenses

If you’re in a situation where expenses are higher than income, find areas in your variable expenses you can cut. Look for places you can reduce your spending—like eating out less—or eliminate a category—like canceling your gym membership.

If your expenses are far above your income, or you have significant debt, reducing your variable expenses may not be enough. You may need to trim your fixed expenses and increase your income to balance your budget.

Aim to have your income and expense columns to be equal. This equal balance means all of your income is accounted for and budgeted toward a specific expense or savings goal.

How Can You Use Your Budget For Personal Finance

After you have set up your budget, you must monitor and continue to track your expenses in each category, ideally every day of the month. The same budgeting spreadsheet or app used to make your budget can also be used to record your expense and income totals.

Recording what you spend throughout the month will keep you from overspending and help you identify unnecessary expenses or problematic spending patterns. Take a few minutes each day to record your expenses, rather than putting it off until the end of the month. 

If you’re not confident that you can budget your money, adopt the envelope system where you divide cash for spending into separate envelopes for different spending categories. When an envelope becomes empty, you’ll have to stop spending in that particular category.

As you use your budget, keep an eye on how much you have spent. Once you have reached your spending limit in a category, you will either need to stop that type of spending for the month or move money from another category to cover additional expenses.

Your goal in using your budget should be to keep your expenses equal to or lower than your income for the month.

7 Budget Tips For Personal Finance

Once you have set up a basic budget, customize it according to your financial situation and goals.

1. If you work on commission, be aggressive in saving to help cover periods when the market is slow. 
2. If you have cash flow issues because you are paid only once a month, divide that payment by weeks, and keep the cash you planned to spend in remaining weeks in a separate account until you need it.
3. Pay with a credit card only if you will have the money to pay it off at the end of the month. Otherwise, you will owe interest on top of the price of whatever you bought.
4. Adjust your budget monthly if you find you overestimated or underestimated your expenses. Keep an eye on large expenses that only occur every few months, such as insurance payments.
5. If you tend to overspend in certain categories, use budgeting hacks such as switching to a cash-only budget.
6. Once your expenses are lower than your income, budget towards savings goals before you increase your spending.
7. Take time to learn other financial skills to improve your financial literacy and make your money work harder for you.

What Is the 50/20/30 Budget Rule And How Does it Work?

Harvard bankruptcy expert Elizabeth Warren—U.S. Senator from Massachusetts and named by TIME magazine as one of the 100 Most Influential People in the World in 2010—coined the “50/30/20 rule” for spending and saving with her daughter, Amelia Warren Tyagi. They co-authored a book on it in 2005 called “All Your Worth: The Ultimate Lifetime Money Plan.”

50%: Needs

Needs are those bills that you absolutely must pay and are the things necessary for survival. These include rent or mortgage payments, car payments, groceries, insurance, health care, minimum debt payment, and utilities.

These are your “must-haves.” The “needs” category does not include items that are extras, such as HBO, Netflix, Starbucks, and dining out.

Half of your after-tax income should be all that you need to cover your needs and obligations. If you are spending more than that on your needs, you will have to either cut down on wants or try to downsize your lifestyle, perhaps to a smaller home or more modest car.

Maybe carpooling or taking public transportation to work is a solution, or cooking at home more often.

30%: Wants

Wants are all the things you spend money on that are not absolutely essential. This includes dinner and movies out, that new handbag, tickets to sporting events, vacations, the latest electronic gadget, and ultra-high-speed Internet.

Anything in the “wants” bucket is optional if you boil it down. You can work out at home instead of going to the gym, cook instead of eating out, or watch sports on TV instead of getting tickets to the game.

This category also includes those upgrade decisions you make, such as choosing a costlier steak instead of a less expensive hamburger, buying a Mercedes instead of a more economical Honda, or choosing between watching television using an antenna for free or spending money to watch cable TV.

Basically, wants are all those little extras you spend money on that make life more enjoyable and entertaining.

20%: Savings

Finally, try to allocate 20% of your net income to savings and investments. This includes adding money to an emergency fund in a bank savings account, making IRA contributions to a mutual fund account, and investing in the stock market.

You should have at least three months of emergency savings on hand in case you lose your job or an unforeseen event occurs. After that, focus on retirement and meeting other financial goals down the road.

Savings can also include debt repayment. While minimum payments are part of the “needs” category, any extra payments reduce principal and future interest owed, so they are savings.

Example of The 50/30/20 Rule

Let’s say your total take-home pay each month is $3,500. Using the 50-30-20 rule, you can spend no more than $1,750 on your needs per month.

You probably can’t afford a $1,500-a-month rent or mortgage payment, at least not unless your utilities, car payment, minimum credit card payments, insurance premiums, and other necessities of life don’t exceed $250 a month.

If you already own your home or you’re locked into a lease, you’re pretty much stuck with that $1,500 payment. Consider relocating when your lease expires to make your budget more manageable or take a look at your other “needs” to see if there’s a way that you can reduce any of them.

Maybe shop for more affordable insurance or transfer the balance on that credit card to one with a lower interest rate so your minimum payment drops a bit.

Your goal is to be able to fit all these expenses into 50% of your take-home after-tax income.

You can spend $1,050 a month on your “wants” based on that $3,500 you’re bringing home each month. You might consider doing without a few things and shifting some of this money to your “needs” column if you’re coming up short there—not necessarily indefinitely but until you can get your needs down to a more manageable level.

Remember, you still need 20% leftover so you can save and pay down your debts according to the 50/30/20 plan. 

Now you have $700 left, that last 20%. You know what to do with it. Pay down on debt, save for an emergency, and plan for your future.

What is Included in a Personal Budget?

As you already know, a personal budget or home budget is a finance plan that allocates future personal income towards expenses, savings and debt repayment. Past spending and personal debt are considered when creating a personal budget.

There are several methods and tools available for creating, using and adjusting a personal budget. For example, jobs are an income source, while bills and rent payments are expenses.

Materials Needed

Pencil and paper

A personal/home budget can be written on a piece of a paper with a pencil and, optionally, a calculator. Such budgets can be organized in ring binders or a file cabinet.

Simpler still are pre-formatted budgeting books or bookkeeping forms in which a budget can be created by filling in the blanks.

Spreadsheet software

Spreadsheet software allows budgeting by performing calculations using formulas, for example in keeping track of income and expenditure. A drawback of budget spreadsheets is that some do not offer date-shifting, so information has to be reentered or moved at the end of each month.

Money-management software

Some software is written specifically for money management. Products are designed to keep track of individual account information, such as checking, savings or money-market accounts.

These programs can categorize past expenses and display monthly reports that are useful for budgeting future months.

Money-management websites

Several websites have been introduced to help manage personal finances. Some may have a privacy policy governing the use and sharing of supplied financial information.

Spending-management software

Spending-management software is a variation of money-management software.

Unlike typical budgeting that allocates future personal income towards expenses, savings and debt repayment, this type of software utilizes a known amount of money, the cash on hand, to give the user information regarding what is left to spend in the current month.

This method eliminates some of the guesswork associated with forecasting what a person might receive for income when it comes to allocating budgeted money.

Like money-management software, some spending-management software packages can connect to online bank accounts in order to retrieve a current status report.

How Much Money Should You Budget For Fun?

If you don’t have a budget, the money you spend on a lunch out here and a dinner out there can add up. And that could be the reason why you never see your bank account balance rise above a certain number.

In fact, having strict spending habits is one thing many wealthy people prioritize and many non-wealthy people don’t, according to research from financial planner, accountant and author Tom Corley.

In his book, “Rich Habits, Poor Habits,” Corley describes how he surveyed 233 wealthy individuals on their financial habits and compared those answers to responses from 128 poorer individuals, or those who earn less than $35,000 in annual gross income.

One of the key findings? The majority of wealthy people lived below their means by keeping unnecessary spending to a minimum.

So what’s the most you should be spending on leisure activities and entertainment, or what you might call ‘fun’?

According to Corley, the magic number is 10 percent of your monthly net pay, or what you take home after taxes and other deductions.

That under-ten-percent figure covers going out to restaurants, bars and the movies. The occasional manicure, massage, boutique fitness class or road trip? Those also fall in this category.

So, for example, if you know you take home $1900 each month, you should not spend more than $190 for the whole month on entertainment. The number might sound like a lot, but if look over last month’s credit card bill, you may be surprised to find you went over it.

In fact, keeping your spending on ‘fun’ below $190 a month might mean making some sacrifices.

“If getting rich was easy, everyone would be wealthy,” Corley writes. “If you want to be somewhere else, logically you are going to have to do things differently.”

What Are The 3 Golden Rules of Money Management

Money management advice is everywhere you turn these days. News programs, business news cable channels, online financial sites, and even your friends and family are eager to share their opinions about how you should manage your money.

But despite all the advice, tips, ideas and new digital tools to manage your personal finances, these three golden rules will never change.

Golden Rule #1: Don’t spend more than you make

Basic money management starts with this rule. If you always spend less than you earn, your finances will always be in good shape. Understand the difference between needs and wants, live within your income, and don’t take on any unnecessary debt. It’s really that simple. 

Golden Rule #2: Always plan for the future

Get into the habit of saving money by paying yourself first. On payday, transfer money to your savings account even before you pay bills. Many banks will let you set up a recurring transfer from checking to savings through online banking, so you can save money automatically.

Planning for the future means preparing for the unexpected, and building up an emergency fund is the best way to handle life’s unforeseen expenses. Having difficulty finding the money to pay yourself first? See Golden Rule #1. 

Golden Rule #3: Help your money grow

Once your savings start to build, you should find ways to grow your money through investing. This is especially important for long-term savings strategies such as retirement planning.

There are many investment tools available at various levels of risk, but always make sure you thoroughly understand the kind of product you’re investing in.

Remember, time is on your side for your retirement and other long-term goals when you start saving and investing as much as you can as early as you can.

How should a beginner budget?

Creating a personalized budget is essential to developing the right spending habits, setting aside money for the long term, and ensuring the money in your bank account goes where it needs to. But how do you make a budget?

Getting started with your first budget may seem complicated, but the following tips will walk you through every step in the process. You’ll learn how to budget, how to avoid common budgeting mistakes, and how to ensure your budget is one you can actually stick to.

1. Determine why you want a budget 

According to surveys, only around a third of all households live by a strict budget. By deciding to budget, you’re joining a select minority — and your decision will pay off.

Budgeters are almost twice as likely to report no financial worries compared with spenders, and they’re less likely to live paycheck to paycheck or struggle with finances. 

While budgeting is always a great decision, it’s good to define goals before you start the process, since the reasons you’re budgeting may impact choices you make during the process. Common reasons to create a budget include:

• Finding a way to save more money
• Reducing overspending on problem areas
• Ending fights about money for couples
• Making sure your spending reflects your goals and values
• Breaking the paycheck-to-paycheck cycle
• Avoiding spending money you don’t have
• Getting out of debt
• Staying on track toward long-term financial goals

While it may seem silly to think about your motivations, psychology plays a big role in how we handle money.

In fact, University of Maryland research into budgeting showed the process of creating a budget makes it more likely goals will be achieved because the process of hashing out the numbers creates an emotional investment, enhances motivation, and discourages cheating.

2. Do a deep dive into current spending habits

Before you can create a realistic budget, you need to know what your current spending habits are. If your budget isn’t realistic, it’s nothing more than a wishlist.

You won’t know if your budget is realistic until you’ve got an idea of where your money is currently going. Most experts recommend tracking your spending for about 30 days to get a clear picture of spending. There are a few ways to track spending:

• Enter your expenses into a spreadsheet or notebook: Whenever you make a purchase, write it down or enter it into a spreadsheet. This is the most hands-on approach but can be time-consuming and you might forget expenditures if not entered immediately. It helps to keep your receipts. 
• Use an app: Apps such as Mint, Dollarbird, and PocketGuard make it easy to track spending by linking your credit cards and bank accounts. Link all accounts and ensure each purchase is labeled correctly to get an accurate assessment. 
• Use your statements: Credit card and bank statements can help track spending, although this approach is less likely to produce detailed results because you may not remember what a particular transaction was for. Still, if you want to get started with your budget right away, going back over a month or two of old statements will give you a big picture to use as a jumping-off point. 

Fewer than half of all Americans responding to Consumer Financial Literacy surveys indicate they have even a “somewhat good idea,” what they’re spending on food, housing, entertainment, and other essential expenditures — so figuring out where your money is going must be part of the budget process

3. Use a calendar to catch irregular expenses

While tracking spending shows you where money goes on a day-to-day basis, your budget should also factor in funds for irregular expenses, such as holidays and birthdays.

Americans who borrowed to cover holiday costs took on over $1,000 in new debt during the 2017 season, according to a Magnify Money survey. Half of those who borrowed would still be repaying holiday debt at least three months later. 

By budgeting throughout the year, you’ll never get into holiday debt again. Some irregular expenses in your budget might include:

• Christmas, Hanukkah, or other gift-giving holidays
• Birthdays
• Annual car inspections and registrations
• Annual vacations
• Property taxes
• Professional dues
• Annual insurance premiums
• Annual medical exams, including veterinary exams

Your calendar and past credit card statements will help you make a list of all expenses that crop up throughout the year.

4. Add up all of your income

Budgeting is about making the best use of income, so you need to know how much money you have coming in. Factor in income from all sources including:

• Wage income
• Money from side gigs
• Alimony and/or child support
• Business income 
• Income from investments

If your income is variable, one of the best budgeting approaches is to pay yourself a salary. This means you’ll decide on a monthly “salary” to base your budget around and when extra money comes in, save it in case of a bad month later.

Read Also: Everything You Need to Know About 50-30-20 Budgets

The monthly income you choose as your salary could be based off what you earn on average, or what you’d typically earn in a bad month if you want to build a bigger cushion and reduce the risk of overspending.  

Those with irregular incomes could also live off last month’s income, updating their budget each month based on what they earned the month prior — but this is a more labor-intensive approach. 

5. Choose a tool to make your budget

The next step is to decide on the logistics of creating your budget. The sample budget above was made in a simple Excel spreadsheet and this approach can be a great one because you don’t need to download any special apps or learn any new programs.

If you want a tool that will allow you to automatically see if you’re on budget, there are plenty of apps you can use. Popular budgeting apps include:

• Mint: Mint is free and offers the option to create a budget. When your bank and credit cards are linked, Mint will track how well you keep to budget limits. You can choose categories of spending, set limits, specify how frequently each expense will occur, and specify whether to start each month with leftover amounts from the prior month. 
• You Need a Budget: YNAB costs $6.99 per month but is billed annually at $83.99. You can try YNAB for free before committing to see if it works for you. You can set spending limits for each different kind of spending, connect your bank accounts to track progress and get detailed reports. 
• PocketGuard: PocketGuard builds a budget for you, based on income and goals you set. The app tracks where your money is going and alerts you to how much it’s safe to spend. The app is free unless you upgrade to PocketGuard Plus, which is $3.99 per month or $34.99 per year.

Here’s an example of Mint’s budgeting program to see how this software works. But don’t get caught up in choosing the right software. If you’re overwhelmed and not sure where to start, your Excel spreadsheet will do fine. 

Conclusion

Budgeting is really easy once you’ve gotten the hang of it — and now you know every step you need to take to budget so you can make your hard-earned money work for you.

Start budgeting today and you’ll see how much happier you are when you live on a budget, save money for your future, and spend guilt-free.