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How to Create a Budget That Works for You

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couple with papers figuring out how to budget

Do you wonder where your money goes every month? You’re not alone. One study shows that 78% of American workers live paycheck to paycheck and barely make ends meet. When expenses like needing to repair or replace an automobile come up, if you among that 78%, you can find yourself in a difficult place financially. That’s where knowing how to budget and having a budget in place makes life easier.

When you budget for expenses and have some savings to cover those expenses, you’re prepared to replace your old car with a newer, safer model or fix the one you have.

Budget Basics

A budget is a system you use to ensure you aren’t spending more than you’re earning and that you’re spending your money on the right things. The word “budget” is scary for some, so you may want to call it “financial management” instead. Whatever term you use, the goal is the same—managing your money to achieve your financial goals.

Think of a budget similarly to how you think of your car maintenance schedule. It’s not there to make your life harder but to make it easier and more automatic to keep your care in working condition. A budget is your financial maintenance system that makes spending within your means and saving for future expenses easier and more automatic.

To start, it’s important to set some budget goals. First, ask yourself what you want to achieve with your budget. What do you want to do? Your answers might include:

  • Save for a major purchase, such as a new car or house
  • Get beyond living paycheck to paycheck
  • Have money for emergencies
  • Save for a vacation
  • Pay off a debt
  • Plan for retirement and other long-term financial goals

Buying a new car, buying a home, paying off debt and building up savings are among the things that motivate people to start budgeting most. And having a goal makes it easier to stick to your spending plan.

How to Budget

Starting a budget is as simple as completing four steps.

  1. Figure out your expenses—both fixed expenses like rent or mortgage and optional like dining and entertainment
  2. Determine your income
  3. Subtract your expenses from your income to see what you have left to spend or put in savings and/or where you can adjust your spending
  4. Track your expenses as you move forward. You can do this manually or using a tool or app

Once you have your income and expenses information, you can see where you spend your money. With that, you can use your budget reign in overspending, pay down debt and put some of the money you have left in savings. You may also find ways you’re wasting money and can adjust expenses to come out ahead financially.

Discretionary funds are made up of the money you have left after you’ve paid for all your living expenses. Hopefully, that’s a positive number. If it’s negative, your expenses are more than your income. And you might consider these options for reducing monthly expenses to more manageable levels:

  1. Review your spending habits and eliminate unnecessary expenses month to month
  2. Negotiate for a lower credit card interest rate
  3. Ask for extensions on bills or payment plans from creditors

The key to how to budget successfully is to accurately track your income and spending and eliminate debt. For a budget to work, you need to make it a priority, but not a burden. Keep your eyes on your savings goals and avoid common budgeting mistakes like neglecting to plan for emergencies. To deep dive into budgeting, see “How to Create a Comprehensive Budget.”

As you master using your budget, keep your eyes on these critical goals of budgeting:

  1. Paying down debt
  2. Creating an emergency fund.

Putting less money in your emergency fund in order to make larger payments on debts is saving money. Once you’ve reduced your debt to a manageable level or paid it off, that money can go into your emergency fund. You can use these tips for building your emergency fund when money is tight. And remember, once you have that emergency fund in place, you can start saving for a dream vacation, a new car, a house or whatever it is you aspire to.

Budget Examples

Most people think of budgets as detailed lists of every purchase broken down into endless categories. The truth is budgeting is a lot like hiking. Some people like to follow a marked path and others prefer the less guided, off trail experience.

Part of mastering how to budget is understanding that not every budget works for every person. The traditional line-item budget and the 50/30/20 budget work well for the first-time and other budgeters. Let’s take a closer look at both.

Traditional Line Item Budget

A line item budget is the type of budget most people are familiar with. It’s a comprehensive budgeting plan that lets you track your income and set spending goals for every expense category. Here’s how to budget using this method:

  1. Figure your monthly income: yours, your spouses and any other income
  2. List all your expenses in budgeting categories, such as:
  • Housing: rent and home repairs
  • Insurance: home, auto and life
  • Taxes: federal, state and property
  • Transportation: gas and vehicle maintenance
  • Groceries/household: food and household items
  • Pet care: food and veterinary care
  • Personal care: toiletries and clothing
  • Health care: medical and dental insurance premiums, deductibles and copays
  • Loan/debt: mortgage, auto loan and credit card
  • Utilities: electricity, phone, cable/satellite, gas and Internet
  • Entertainment: dining out, movies, concerts and hobbies
  • Savings/emergency fund: savings account with enough money to cover six months of expenses or unexpected expenses. This is a savings account you can use for surprise, or unforeseen, expenses like the transmission going out in your car. Don’t skip an emergency fund as you master how to budget.
  1. Calculate total expenses
  2. Subtract your expenses from your income

One your line item budget is complete, you can use it to track your spending against your income moving forward and adjust spending as needed.

A traditional line-item budget is a good option for those who have a specific savings goal, like purchasing a new car, because it shows exactly where you can trim funds and where you can’t. For example, it’s okay to take money away from entertainment but not from loan payments, insurance or housing.

Make creating a line item budget easier with a free Google Doc monthly budget template or a budgeting app, such as Intuit Mint.

50/30/20 Budget

The 50/30/20 budget rule is a percentage budget that provides more freedom in spending. Learning how to budget this way is simple. You divide you after-tax income into three areas:

  • 50% of income goes into needs
  • 30% of income goes into wants
  • 20% of income goes into savings

Needs are things you must pay for like food, rent, mortgages, utilities and health care costs.

Wants are things you can do without like movies, concerts, the latest electronic devices and dining out.

Savings includes money deposited in an emergency fund and debt repayment in the form of extra payments toward principal. The principal is the actual amount you pay for an item—the original loan amount—and doesn’t include loan interest. Paying extra towards principal can help you pay off loans sooner.

Using a 50/30/20 budget, an income of $2,000 a month would put $1,000 towards needs, $600 toward wants, and $400 towards savings. You can alter the percentages to fit your financial goals, too. You may think $600 for wants seems a bit much, so you adjust your budget to 50/20/30 and put $600 in savings and leave $400 for wants. If your expenses are more than $1,000 each month, switch to a 60/10/30 ratio.

Some people find the percentage method easier and less stressful than tracking every single individual expense. Whatever you choose, the goal of learning how to budget is to create a spending plan that fits your individual financial needs and long-term goals.

Budgeting Tools

Tools and technology make creating a budget even easier. From computer software to cell phone apps, there’s no shortage of budgeting apps and tools to help you find a budgeting strategy that works for you.

  1. Excel spreadsheet templates are available with Microsoft Office. There are a variety of pre-designed budgeting templates that you can fill in yourself to create a working budget.
  2. A free Google Doc monthly budget template is available online and offers a great way to start your budget.
  3. Quicken is an affordable budgeting software program you can purchase for home use. It allows you to connect directly to bank accounts to download financial information. Quicken automatically categorizes your spending and creates a personalized budget for you. And you can customize all aspects of the program to fit your budgeting needs. Quicken also offers a free online budget calculator.
  4. Mint.com is an online and phone app that offers free sign. It tracks income and spending, provides convenient budget categories and tracks month-to-month and year-to-year spending and saving activities.
  5. Wally is a personal finance app for iPhone with a Wally+ version available on Android. It’s currently free with paid premium features in the works. Wally offers traditional budgeting features and plans to be computer-accessible soon.
  6. Every Dollar is accessible on iPhone, Android and It lets you manage your finances from anywhere. It’s free to sign up and has an easy-to-use platform for those new to budgeting.
  7. Clarity Money is 100% free to use. It uses artificial intelligence (AI) to provide up-to-the-minute budget analysis and advice on everything from spending to saving and investing.
  8. You Need a Budget lets you connect to bank accounts, create spending categories and even create special budget accounts like saving for a car, for Christmas or any other event. It offers a free trial of 34 days, so you can see if it works for you.

Mint and Clarity Money are a few of the favorite tools used by the Credit.com team. Give them all a look and see which one fits your financial goals best.

Managing Your Expenses with Confidence

Learning how to budget and mastering using a budget is easier than you think, just remember these key points when creating your budget:

  • Make budgeting a priority
  • Pay down debt
  • Put money in an emergency fund

Mastering your budget makes it possible to save money. And with effective financial management, you can save enough money for a down payment on a new car, and with an auto loan, replace that old car or truck.

Open a Savings Account

The maximize your emergency fund or your savings for that new car, open a savings account that pays interest on the money you have in the account. Many accounts let you open the account with no minimum deposit, so you can open it today and have it ready as soon as you’ve determined how much you can put in your emergency fund each month.


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