What is a budget and how to make one?

Creating a budget is key to helping you reach your goals, whether you want to take a vacation, buy a home, or save for retirement. Not sure where to start? Here are some steps to get you on the right path.

What is a budget?

A budget is a spending plan. You essentially look at your monthly earnings and make deliberate decisions about how you’ll spend (or save) that money each month. Being intentional about your choices helps you pay your bills on time, avoid overspending, and build financial stability.

Why should I create a budget?

It’s easy to spend money without thinking about the big picture. Creating a budget puts you in control so you can:

• get a clear picture of your spending habits. You may not realize how much you spend on impulse purchases, for example, or dining out. A budget shines a light on your spending.
• adjust when your income dips or expenses rise. With a budget, you can clearly see areas where you might be able to reduce your spending.
• free up money to pay off debt. A budget can help you set specific goals and work toward them, such as paying off debt. It can also help you avoid accumulating debt. It’s easy to rack up debt without noticing when using credit cards, for example. But with a budget, you know exactly where your dollars are going.
• save to buy a home, a new car, or another large purchase. When you create your budget, you can decide to save a specific amount of money each month toward your goal.

How to make a budget?

First, decide how you’d like to track your budget. Options range from simple to more sophisticated, but the best choice is the one you’ll use.

You can track your budget using:

• pen and paper. Keep a notebook and jot down your purchases as you make them.
• a spreadsheet. Use spreadsheet software to track your monthly income and expenses.
• the cash envelope method. Decide how much you want to spend monthly on each category — such as clothing, dining, and gas. Use an envelope for each category, and tuck the allotted amount of cash in it. Spend only from your envelopes and when the money runs out, you’re finished making purchases in that category until next month.
• a budgeting app. Many apps let you connect your financial accounts for automatic tracking.

Steps to creating a budget

Ready to create a budget? Here’s how to do it:.

1. Calculate your monthly net (take-home) income. Review your pay stub and make sure to include any other money you receive, such as child support or income from your side hustle. If your income is irregular, review your earnings from the past few months and use the lowest monthly total.
2. List your expenses. Start with regular monthly bills like your mortgage or rent payment, energy bill, and phone service. Then add expenses like food, gas, clothing, and entertainment. It’s easy to overlook expenses, so hop online and review your recent bank statements. You may find a streaming subscription or other expense that slipped your mind.
3. Separate your expenses into needs and wants. The core necessities, sometimes called the 4 Walls, are shelter, food, utilities, and transportation. Then there are other essentials like insurance, childcare, and debt repayment. Wants include things like entertainment and other personal spending.
4. Determine your financial goals. Would you like to pay off your student loans? Save up for a trip? Decide on your goals so you can create a budget that will help you achieve them.
5. Do the math. Subtract your expenses from your income to see how much you have left over. If you don’t have much remaining, identify areas where you can cut back.
6. Create a spending plan. Your budget should be designed to cover your essentials and work toward your financial goals. There are various ways to create a budget. One popular approach is to use a 50/30/20 budget, in which you spend 50% of your take-home earnings on essentials, spend 30% on wants, and put 20% into savings. If you live in an area with a high cost of living, you may need to adjust that to 70/20/10.

Budgeting Habits

Nearly 86% of people say they regularly use a budget, according to Investopedia. But fewer than 25% say they stick to their budget.

Monitor your budget

It’s important to stay on top of your budget by revisiting it every month or quarter, and whenever your income, expenses, or goals change. Learn how to manage your budget so you can stay focused on your goals, come what may.