Most Americans are in debt. Here’s how to create a budget.
Budgeting is an essential component of sound financial health that ensures you don’t overextend yourself.
Why it matters. The average American carries $90,000+ in debt. Knowing how much money you make and spend helps you keep perspective on your bank account—and your family’s economic situation.
Budgeting is necessary for managing your finances and achieving your financial goals. Creating a budget involves constructing a plan for allocating your income to different expenses, as well as savings—be it into a high-APY savings account, 401(k), or other long-term savings options.
Steps for creating a budget
- Track your income. Write down all of your sources of income, including your after-tax salary, any investments, and additional income. If you’re working on a family budget, make sure to include everyone’s income. And if you’re a contractor, deduct expected taxes before adding the amount into the surplus column.
- List all of your expenses. This includes rent or mortgage, utilities, transportation, groceries, and any other recurring expenses. Scan your last few months of credit and debit card statements to identify regular expenses.
- Create a budget. Begin by making categories for your expenses, such as housing, transportation, and entertainment in a spreadsheet. Next, allocate a portion of your income to each category. Be sure to leave room for savings and unexpected expenses. Using a budget calculator or spreadsheet allows you to tally both columns easily.
One tip for sticking to your budget is to regularly track your expenses, as they might increase without you realizing it. By keeping a record of your spending, you can compare it to your budget and adjust as necessary.
Another tip is to set specific financial goals, such as saving for a down payment on a house, storing money away for a child’s future tuition, or paying off credit card debt.
There are a number of methods for creating budgets, including the envelope method, in which you tuck away money into specific envelopes each month—this could also be done in some digital wallets that allow for multiple accounts—and the zero-based budget, in which every dollar you make is assigned to a specific purpose.
Another popular framework is the 50/30/20 method:
- 50% of your income goes to needs: housing, food, schooling costs
- 30% is for your wants
- 20% goes to savings and/or paying off debts
Benefits of budgeting
Budgeting has many benefits, including:
- Increasing your savings and investment accounts
- More easily paying off debts
- Achieving your financial goals
On top of this, budgeting allows you to take control of your finances in a way that you can’t without insights into your spending and earning habits. Budgets also help you make more informed decisions about your spending—deciding what’s necessary for survival and what you can put off, or even do without.
The big picture
Budgeting is an essential aspect of managing your finances and achieving your financial goals. By tracking your income and expenses, creating categories for your expenses, and allocating a portion of your income to each category, you can create a budget that works for you.
Regularly tracking expenses and setting specific financial goals can also help you stick to your budget. The benefits of budgeting are numerous, including saving money, paying off debt, and achieving your financial goals.