More Americans are realizing that budgeting is an essential tool to reach any financial goal. Eighty percent of Americans now keep a budget, and 97% of Americans think everyone needs a budget, according to a recent CFP Board survey.
For those who don’t budget, the top-cited reason is not having enough income. But if you're a low-income earner, it’s even more important to actively learn how to manage your money because you have less discretionary income to put toward a financial emergency.
About 25% of survey respondents also said budgeting was too time-consuming, and 21% said that budgeting brought on anxiety. But budgeting and money management don’t have to be a headache.
And the financial benefits are universal: More control, greater resiliency, better spending habits — and most likely, a boost to your credit score.
Here are some budgeting tips to help you save money without the headache.
6 steps for creating your budget
1. Review your monthly income
Before you even start establishing a budget, you’ll need to collect some basic information. That includes adding up your family’s monthly income from various sources, including employment, side hustles, passive income, investment income, and gifts.
Your total take-home pay will be the starting point from which you subtract your various expenses.
2. List your monthly expenses
You probably have a variety of bills you can expect monthly. These include living expenses like utility bills, rent or a mortgage, phone bills, and cable/streaming services. You should also list any monthly debt payments you’ll need to make, including student loan payments and personal loans.
If you’re carrying a credit card balance, you should decide on a monthly amount to put toward paying down your credit card debt, in addition to the minimum payment owed.
3. Track your spending
Down the road, you’ll want to set spending limits for expenses that can vary. A good place to start is to track what you’re already spending and make adjustments from there.
Get into the practice of logging your expenses in each category. You can do this manually with pen and paper, set up a spreadsheet, or use a budgeting app (we’ll discuss these in greater detail later on).
4. Set goals
Once you have you have a picture of your income and expenses and are tracking your spending, it's a good idea to set some financial goals. A good way to start is to make a list of both short- and long-term goals.
Short-term goals could include paying off credit cards or starting an emergency fund and should have a time frame of about one to three years. Long-term goals, on the other hand, can take decades to achieve and could include saving for retirement or your child's college fund.
Remember that these goals are just a starting point. You can adjust them as needed, but writing them down ahead of time can help create a plan to work towards your goals.
5. Make a budgeting plan
Now that you know where your money is going and have identified your goals, you can create a budgeting plan to make sure you have enough money to make everything happen.
Start by looking at both your fixed expenses and variable expenditures and compare those to your income. Then consider where you can make adjustments to achieve your financial goals.
This is where you will have to get honest with your priorities. If you're subscribing to multiple streaming services, you may have to cut back on one or two to free up money to pay towards your credit card debt.
Similarly, if you're struggling to find money to put aside for retirement, you may want to consider more drastic measures, like moving to a place with a lower rent.
6. Track and review your budget regularly
Having a budget and sticking to it are two very different things. Part of your budgeting process involves regularly reviewing it to make sure you're keeping your spending within the limits you set for yourself.
Expenditures have a way of creeping up when you're not looking. Groceries get more expensive, the price of utilities rises, and you think adding one more subscription won't matter that much.
On the flip side, your income may change as well. Maybe you've gotten a raise (more money) or have to pay more now for your company's health insurance plan (less money).
Bonus tip: Park your money in the right place
Saving is key to any budgeting plan, and the best savings accounts can help you grow your nest egg effortlessly.
Keep your emergency fund and other savings in a high-yield savings account. These accounts typically offer higher interest rates than traditional savings accounts.
If you hoard all your money in your checking account or a traditional savings account, you’ll miss out on the opportunity to accrue interest.
5 budgeting types to consider
There are a variety of ways to go about building a budget, and some are more stringent or complex than others.
Decide how much time you can devote to budgeting each month, and select a budgeting method you know you can be successful with.
1. The zero-based budget
Zero-based budgeting involves finding a purpose for every dollar you earn. You start by subtracting your necessary expenses from your income. That includes budgeted amounts for things like groceries as well as your car payment, rent/mortgage, and utilities.
Next, move on to your financial goals. These might include saving for retirement, getting out of debt, or funding a major purchase. With zero-based budgeting, you’ll allocate some money to each of these goals.
Everything left can be used for the things you enjoy but don’t necessarily need. Essentially, this is your budget for dining out, entertainment, and shopping.
Zero-based budgeting ensures you never overspend, but it also requires frequent maintenance. If you need to overspend in one category because of an unexpected expense one month, the rest of your budget needs to be adjusted, unless you can use the leftover income to cover it.
2. The 50/30/20 budget
The 50/30/20 budget requires you to allocate money to just three separate categories, like so:
- 50% of your income for necessities
- 30% of your income for discretionary spending
- 20% of your income for saving
Although this is super simple, it will only work if 50% of your income will cover your essential bills. If it doesn’t, you may have to make your own version of the 50/30/20 budget.
For example, you might decide that only 15% of your income should be reserved for nonessentials, like dining out. You may also want to consider adding a category for charitable giving.
You’ll want to keep the 20% savings goal relatively fixed, however. This may mean you’ll have to find some ways to trim your budget.
3. The 80/20 budget
The 80/20 budget is an even simpler version of the 50/30/20 budget. It involves putting 20% of your income into savings (emergency fund, retirement account, future purchase goals, etc.) and spending the other 80% on everything else.
This budget works well with the pay-yourself-first rule of budgeting that many financial planners recommend. Every time you receive a paycheck, put 20% of it into savings. You’ll be able to spend only what’s left over.
It can also help to automate your savings through automatic contributions to your retirement account and automatic deposits into a high-yield savings account.
4. The envelope budget
Envelope budgeting requires the most effort but gives you the greatest level of control over where your money goes. If you tend to live paycheck to paycheck or spend more than you earn, you could benefit from this type of money management.
Envelope budgeting is traditionally a cash-based system. It’s similar to the zero-based budget but involves setting spending caps for every category, even discretionary spending categories.
You start by adding up your income and subtracting any fixed monthly bills. If you have quarterly or annual bills, don’t forget to include the monthly amount for these. You’ll also choose an amount to save each month and subtract that.
All the cash that’s leftover should be divided into envelopes labeled with various spending categories, such as:
- Household items
- Personal care items
- Dining out
- Fitness expenses
- Giving to charity
You should track your spending and keep a record inside the envelope. When the money's gone, you can no longer spend in that category. If you have money left over in any of your envelopes at the end of the month, deposit it into savings or add it to one of next month’s envelopes.
If this sounds like a great way to stay on track, but you don’t want to use cash, you can use a budgeting app that works similarly. That way, you can still take advantage of credit card rewards. You’ll just need to hold yourself accountable for sticking to your spending caps in each category.
5. The bare-bones budget
This monthly budget is ideal for someone who wants to join the FIRE movement and retire early, someone who has lost a job and needs to temporarily adopt a frugal lifestyle or someone who is drowning in debt.
It’s very simple: You only buy absolute necessities. You pay your rent/mortgage, utility bills, car payment, health insurance, and other expenses you can’t avoid. You buy only the groceries, household items, and personal care items you can’t live without. And anything leftover goes to savings and paying off debt.
This is also sometimes called a spending freeze, and it can be helpful during times of financial hardship or while trying to achieve a lofty financial goal.
5 budgeting apps to help you stay on track
Depending on your financial situation, a budgeting app could be worth considering. When used wisely, budget apps can help you avoid overspending. And the best part? You can track spending right from your smartphone, which makes these solutions more convenient than traditional budgeting software.
Here are five great options for your personal budget. You can also check out more options in our guide to the best budgeting apps.
- YNAB (You Need a Budget)
Mint is a personal finance app that securely connects to your credit card and debit card accounts so you can get a comprehensive, real-time overview of your spending. You can even track your investments and outstanding loans, so you can tell at a glance if you’re above or below water.
Mint also automatically tracks your spending by category to help you identify where your money is going. There’s a web version, and it’s also available for iOS and Android. Mint is free to use.
2. YNAB (You Need a Budget)
YNAB combines the concepts of zero-based budgeting and envelope budgeting with a digital budgeting platform that’s available for web, iPhone, Android, iPad, Apple Watch, and Alexa.
You manage cash flow by assigning every dollar you get to a spending category, and it’s easy to make adjustments as you go. It also makes it easy to share your budget with your family.
YNAB costs $11.99 per month or $84 per year, but you can try it free for 34 days, and the average user that is new to budgeting saves $200 in the first month.
Goodbudget is a spending tracker based on the envelope system. You digitally allocate your income to different spending categories, and you can share your budget with your partner as well, which makes it simple to track your cash flow as a family.
Goodbudget is available on the web and for Apple and Android. There’s a free plan that comes with a limited number of envelopes and only one account on two devices, and there’s a premium version that costs $7 per month or $60 per year.
Dollarbird is a calendar-based budget app that’s perfect for tracking your spending prior to creating a budget or for keeping track of a 50/30/20 or 80/20 budget. Because you enter every expense manually, it forces you to always have an eye on your finances.
You can add past, future, and recurring transactions and categorize them. You also add your income as you receive it. Dollarbird keeps a running total of how much available cash you have, so you won’t be tempted to overspend.
There’s a free version for individuals, but if you want to collaborate with multiple accounts, you’ll need to purchase Pro. It’s $3.33 per month or $39.99 per year. It’s available on the web and for Apple and Android.
PocketGuard is a free budgeting app that works similarly to Mint. It keeps track of your upcoming bills, automatically categorizes your spending, and connects all your accounts in one place.
It’s an easy way to keep track of your net worth, and there’s even an autosave feature to help you grow your savings. PocketGuard is available for iPhone and Android.
How do you start budgeting?
One of the best ways to start budgeting is by reviewing your monthly income and expenses, which may include looking over bank accounts and credit card payments. This will give you exact numbers on the amount of money you have coming in and how much money is going out.
In addition, you’ll know what your money is being spent on. Once you have everything tracked, you’ll know where you can cut expenses and what adjustments need to be made to your spending plan.
What’s the 50/30/20 budgeting rule?
The 50/30/20 budgeting rule is an important budgeting tool that separates your budget into three categories: necessities, discretionary spending, and savings. According to the 50/30/20 rule, these are the percentages of your income that should be allocated to each category:
- Necessities: 50%
- Discretionary spending: 30%
- Savings: 20%
Separating your income into these three budget categories can help increase your overall financial health as you work toward building your savings without going overboard on unnecessary spending.
What's the best budgeting app?
The best budgeting app is the one that most aligns with your financial goals and lifestyle. Each budgeting app has different features, so it makes sense to find one that works for your unique situation.
For example, Rocket Money can help you set savings goals, find and cancel unwanted subscriptions, and negotiate expensive bills for you. But if you want automated savings dictated by your spending habits, Digit may be the better option.
Whether it’s to save for a down payment on a house or work on a debt repayment plan, comparing budgeting apps can help you find the best one for your needs.