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Budgets: Building Blocks of Financial Stability
Budgets are useful tools to help you manage your money.
Budgeting could help you manage your spending and make setting money aside easier. And the more you save, the more stable your finances may become. If you’ve never created or used a budget before, getting started may feel daunting, but it’s easier than you think.
Here’s why budgets matter and how to create one that works for your goals.
Key Takeaways
A budget is a spending and saving plan that could help you meet your financial goals each month.
Building a budget may make it easier for you to save money and improve your financial situation.
Regular budget reviews allow you to make adjustments based on changes to your finances.
What Is a Budget?
A budget is a plan that helps you track and manage your money flows and potentially gives you more control over your finances. Your budget outlines your income, spending, and saving in a way that works for you—in a spreadsheet, through an app, or even with pen and paper.
No matter what your budget looks like, or how you use it, your budget is meant to support your efforts meeting short and long-term goals.1
Budgeting Benefits
When you’re starting out, building a budget requires some investment, but once you get going, you’re likely to see a few benefits, such as2:
Understanding your spending: Budgets help to give you a clear picture of how much you’re spending, by category, and allow you to compare overall money inflows to money outflows.
Setting clear goals: When you have a good budget in place, it could help you set and achieve savings goals. You have a clearer picture of what you’re spending and where you could cut costs to increase your savings.
Allowing for intentional money decisions: When you know where your money is going, you may be able to make more informed decisions about your finances.
Types of Budgets
Your budget should be tailored to your financial situation, but you don’t have to start from scratch. There are several established budgeting methods you could use to strengthen your finances. Here are a few options.
Pay yourself first: This method focuses on helping you build your savings aggressively. You’re encouraged to set a certain amount aside toward your savings, investments, and other accounts and then use the rest of your earnings to cover other expenses.3
Zero-based: The zero-based method assigns a role to every dollar you earn. You allocate each dollar you earn to your savings, bills, investments, and so forth, accounting for every penny you earn.4
50/30/20: This method divides your earnings by percentages. Necessities comprise 50% of what you earn, like rent, insurance, and other bills. Then, 30% goes toward your wants, like that new video game platform or TV. And 20% goes toward your savings and paying off any debts you have.5
An alternative to these ratios is 60/30/10, where 60% of your earnings go to necessities, 30% still goes towards wants, and now only 10% goes toward savings and paying off debts. This may be helpful if you’re facing increased living costs.
Value-based: Value-based budgets focus on aligning your spending patterns with your values. It encourages you to set aside money for expenses and purchases that bring value to your life.6
Regardless of the method you choose, tailor it to your unique situation and goals to help make it work for you.
Budgeting Mistakes to Avoid
Building a budget may make it easier to take control of your finances, but there are some mistakes to avoid as you start creating yours.7
Not planning for all expenses: Budgets work best when you account for all expenses, including those occasional splurges. Be honest with yourself when establishing a budget and account for every type of expense you need to cover.
Not tracking your expenses and income: It’s essential to track how much money you’re bringing in and how much you’re spending each month in order to understand what you’re working with. It may seem like a lot of detail, but going through your bank activity and credit card statements could give you the insight you need to truly understand how you spend.
Never revising your budget: Your budget should change over time. Get in the habit of reviewing it at least once every six months and update your allocations as needed to help you reach your goals.
Using variable income as an excuse: You don’t need to have stable income to create a budget. You could still create a budget if your income changes due to varying hours, drops in pay, and other factors. Consider working with an average income amount for planning and adjust as you go.
Using funds in one category for other purposes: Budgets work best when you stick to them. If you’re setting a certain amount of money aside for a certain category, such as groceries, make sure you use that money only for that category’s expenses. This doesn’t mean you can’t purchase items you enjoy – just use your “fun” category rather than money set aside for bills or other essentials.
How to Start Budgeting
Starting a budget is easier than it seems. It starts with tracking your expenses so you know what you need to budget for. Choose a tracking system that works for you, whether it’s a mobile app, a spreadsheet, or old-fashion pen and paper. When tracking, account for everything from bills to the occasional splurge purchase.
Once you’ve tracked your expenses and have an understanding of where your money is going, choose a budgeting system that fits your financial situation and goals. For example, the pay-yourself-first method could be good for predictable income, while the 50/30/20 method could work well for variable income. Use your chosen method to assign roles to your income and expenses.
After budgeting your money, take some time to set goals for your finances. These could be anything from cutting spending in a specific category to building your savings by a set amount each month. Just make sure the goals you set work for you.
After a month or two, reevaluate your budget and see how it’s going. If you’re consistently meeting your goals, your budget is working. But if you’re struggling to set money aside or have new savings goals in mind, revising your budget may be a good idea. Remember, budgets should change as your financial situation changes.8
Final Thoughts
Creating a firm budget may help you keep your spending on track. And as you build your savings, you may be better equipped to handle unexpected expenses without going into debt. Still not sure how to make your budget work for you? Check out our budgeting tips for more helpful hints.