Budgeting helps you track spending, find ways to save, and work toward your financial goals. It can help you stay focused on both short-term and long-term priorities. Learning how to budget is often the first step toward better money management, and even kids and teens can benefit from understanding the basics. If you want more control over your finances, these budgeting and saving tips to get you started.
What Is a Budget?
A budget is a plan for how you use your money each month and a key part of your personal finances. Knowing where your money goes can make it easier to reach goals such as:
- Building an emergency fund
- Saving for retirement
- Setting aside money for a vacation
Why Should I Try to Save Money?
Without a budget, it's easy to lose sight of your financial goals. Small and unexpected expenses can add up quickly, making it harder to save money or pay down debt. Budgeting helps you track spending while continuing to build savings for future goals.
Life can be unpredictable. A savings fund can help cover expenses if you lose your job or face an unexpected car repair. You may also have goals such as buying a home, starting a family, or retiring comfortably. Saving consistently and building good financial habits can help you prepare for both planned and unexpected expenses.
Setting Financial Goals
How much should you save? A personal budget can help you find the answer because everyone's situation is different.
For example, a 30-year-old may have different savings goals than someone nearing retirement. Younger savers often have more time to benefit from compound interest, so starting early can help build savings for retirement and other long-term goals.
The amount you may need depends on factors such as your age, income, and lifestyle. Reviewing your finances can help you estimate how much to save for both short- and long-term goals.
Consider saving in three key areas:
- Emergency Fund: Money set aside for unexpected expenses.
- Short- and Medium-Term Goals: Savings for expenses such as a wedding, education costs, repaying family members or paying down debt.
- Long-Term Goals: Retirement is often the largest long-term goal.
A retirement savings calculator can help estimate how much you may need to save.
How to Create a Budget
A budget can help you cover expenses, pay down debt, and save for retirement. Here are steps to follow when creating one:
- Calculate Your Take-Home Pay: Start with the money you receive after taxes and deductions, such as health insurance and retirement contributions.
- Track Your Spending: Review expenses from the past month, or several months if possible. Include fixed costs, such as your mortgage or car payment, and variable expenses that may change each month, such as credit cards.
- Review Your Goals: Determine how much you need to save each month to reach your goals.
- Create a Plan: Compare your current spending to your goals and identify areas where you can reduce expenses and increase savings.
- Adjust as Needed: Revisit your budget regularly and update it as your circumstances change.
Budgeting apps and tools can help you track spending and savings. Automating bill payments and savings transfers can also help keep your finances on track.
Budgeting Methods to Consider
Creating a budget is fairly simple. Sticking to it is often the harder part. Using a budgeting method that is easy to follow and supports realistic goals can help you build strong financial habits.
The right budget is the one you can maintain. Here are a few common approaches.
The Classic Budget
This simple method involves subtracting your expenses from your income. Any money left over can go toward savings or debt repayment. If your expenses exceed your income, review your spending and identify areas to cut back.
The 50/30/20 Budget Rule
The 50/30/20 Rule divides your income into three categories:
- 50% for Needs: Housing, transportation, utilities, groceries, and other necessary expenses.
- 30% for Wants: Discretionary spending such as dining out, streaming services, and gym memberships.
- 20% for Savings and Debt Repayment: Savings goals, retirement contributions, and paying down debt.
For example, if your take-home pay is $5,000 per month:
- $2,500 for needs
- $1,500 for wants
- $1,000 for savings and debt repayment
The Weekly, Monthly, or Yearly Budget
A budget should be reviewed regularly and adjusted as your circumstances change. Some people find it easier to track spending weekly when starting out, then move to a monthly budget once they become more comfortable.
Budgeting is a skill that improves with practice. Review your progress, make adjustments when needed, and give yourself credit for the progress you make along the way.
Budgeting Tips for Different Life Stages
Budgeting on a Lower Income
It's not hard to look at your expenses and see the list pile up. Especially when your money and budget is already tight, it can be a challenge to figure out where additional savings can come from. But there are strategies for finding a few extra dollars to save every month.
- Consider negotiating your bills: You may be surprised at how many bills you can lower by calling and asking. Of course, do your prep work first. Shop around if your providers won't negotiate.
- Look for support: Many programs are aimed at helping people living paycheck to paycheck manage finances and pay off debt. Look for services in your local area
Budgeting as a Couple
Creating a budget together as a couple requires agreement on spending, saving, and debt repayment goals. Decide how to share costs, whether equally or based on income. A clear plan can help both partners stay aligned and meet financial goals.
Budgeting for Children
Raising children adds expenses for healthcare, childcare, food, clothing, housing, and activities. When planning for children, consider the following tips:
- Research costs based on your location and your children's ages.
- Plan for higher healthcare and childcare expenses in the early years.
- Set aside money for unexpected costs, such as school supplies and medical copays.
- Review your budget annually as your family and expenses change, especially when considering additional children.
Budgeting in Your 30s
Budgeting tips for individuals in their 30s involves focusing on setting priorities, build savings, reduce unnecessary spending, and preparing for larger future expenses. Small, consistent changes can have a lasting impact.
Budgeting in Your 60s
When entering and budgeting for your 60s, it's important to review your retirement income, work toward reducing debt, consider downsizing if appropriate, and meet with a financial advisor to prepare for retirement.
Budget Without Changing Lifestyles
For most people, the biggest opportunity for potentially cutting expenses is in their discretionary spending. That includes non-necessary costs and the things you do for fun. If you're struggling to maintain a budget, you may have to look closer at your lifestyle to see if you can make some cuts.
Here are a few suggestions to consider:
- Watch for Lifestyle Creep: One common challenge is lifestyle creep, sometimes called "revenge spending." As income increases, it's easy to gradually spend more on upgrades and conveniences, even when previous spending habits were working well. Small adjustments in these areas may help free up money for savings without dramatically changing your lifestyle.
- Schedule No-Spend Days: Another strategy is to plan one or more no-spend days each week. During these days, avoid nonessential purchases such as coffee shop visits, restaurant meals or any impulse purchases. No-spend days can help increase awareness of spending habits while creating additional room in your budget.
- Try a Different Budgeting Method: If you're struggling to stick to a budget, trying a different budgeting method may help, since different approaches work better for different people. Options like the cash envelope system and zero-based budgeting can make it easier to control spending, track where your money goes, and reduce unnecessary expenses.
Strategies to Build a Fund for Emergency Expenses
Life will often send unpredictable expenses your way, so it's important to have a plan to help cover these costs when the situation arises.
Emergency Fund
An emergency fund can help cover your basic lifestyle needs if you lose your job or face significant unexpected bills, like medical expenses. Once you review your budget, you'll know how much you need to survive month to month. Use that as the basis of your emergency fund. Then, you can make a goal to have a few months of savings to cover the unexpected, usually recommending three to six months' worth.
An emergency fund calculator also helps with figuring out your needs.
Rainy Day Fund
While both cover expected costs, a rainy day fund is usually for (hopefully) minor expenses, such as a vet bill or car repairs. If you're working on building up savings for emergencies, one strategy could be to set a goal to boost your rainy day fund first and then build a bigger emergency fund.
Specialized Savings Accounts
Some savings vehicles are designed for specific purposes. For example, a health savings account (HSA) allows eligible individuals to contribute pre-tax dollars for qualified medical expenses, such as prescriptions and copays. Using an HSA may help reduce the need to draw from your emergency fund or other savings accounts for healthcare costs.
Managing Debt While Saving
From credit card bills to student loans or health care costs, it can feel draining to find a way to pay down debt while saving for the future. But there are strategies you can use to manage both.
Prioritize High-Interest Debt
Not all debt affects your finances the same way. Consider focusing on:
- Credit card balances
- Payday loans
- Other high-interest debt
Reducing these balances may lower borrowing costs and create more flexibility in your budget.
Create a Debt Management Strategy
A debt management plan can provide a structured approach to repayment. Depending on your situation, strategies may include the debt snowball or avalanche methods, credit counseling programs or consolidating eligible debt.
Incorporate Investing Into Your Budget
Define Your Investment Goals
As you plan for some of those medium- and long-term savings goals, you may want to explore your investment options and consider how to work those into your budget.
Many individuals build wealth through budgeting focused on saving and investing in the stock market. But there's no one-size-fits-all solution for investing. Determining your goals and risk tolerance serve as a great first step to finding the investment opportunities that may work for you.
Don't Overlook Your 401(k) Match
If your employer offers a matching contribution, contributing enough to receive the full match may be one of the simplest ways to increase retirement savings.
For example, if your employer matches 50% of contributions up to 5% of your salary, contributing at least 5% allows you to receive the maximum employer match.
Review and Adjust Regularly
Your budget and investment strategy should evolve as your circumstances change. Review both periodically to account for income changes, new financial goals, major life events and market fluctuations.
The Bottom Line
Making a budget and sticking to it is a great way to start building sound financial habits for the long-term. As you develop your future financial goals, it may make sense to sit down and chat with a financial professional. They can work with you to review your budget, help set realistic goals and start on the path to a stronger financial future.
