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Key takeaways:
- Everyone, regardless of age or income, needs a budget.
- A budget helps you meet short-term and long-term financial goals by allowing you to track your spending against your income.
- It’s not difficult to develop a budget, and most people find the information both surprising and useful.
A good budget gives you a roadmap you can use to make smart financial decisions. But if you have never put together a budget, it’s hard to know where to begin. We're here to help you get started.
Here are five questions most people have about setting up a budget.
1. Who needs a budget?
Everyone. Regardless of your income, or whether you’re a student, a retiree, or something in between…if you earn or spend money, you need a budget.
2. What is a budget?
A budget is a financial plan you can use to help track how much you earn and how much you spend. It helps you set aside money for fixed expenses that stay the same from month to month; it also helps you save for special goals like buying a car or a home.
3. What information do you need to develop a budget?
You’ll need to do a little research to gather your information.
- Income includes not only your regular take-home wages, but also extras such as alimony payments or child support, as well as pension, Social Security, or other income that you can count on each month.
- Fixed expenses stay about the same from month to month and include things like mortgage or rent, homeowners/car/other insurance, healthcare and prescriptions, groceries, utilities, childcare, tuition, car/student loan payments, credit card payments, child support or alimony, and others. If you make regular contributions to a savings or investment account, or to a charity, include those here as well.
- Flexible expenses vary from month to month, and include things like travel, entertainment and dining out, gifts, gas, clothing, household items, and others.
- Monthly expenses include subscription-based costs such as cable and internet, mobile phone, TV/movie/music streaming, online gaming, gym memberships, home security, digital news subscriptions, online apps, and others.
Did you know?
A 2022 consumer survey found that Americans underestimated their monthly payments for subscription services—by a lot. Their average original estimate was $86, but they actually spent $219, which was about 2.5 times more. *
4. How do you put together a budget?
First, total up your income. Next, group your fixed expenses into categories, so you know how much you spend each month on things like housing, transportation, food, insurance, and childcare expenses. To calculate your flexible expenses, you’ll have to look at past spending. Check credit card statements as well as debit and ATM records over the past several months to give yourself an idea of how much you spend on things like dining out, gas, clothing, and household expenses. Next, put together a comprehensive list of the subscription-based services you use. If you have savings and investment goals, be sure to also list your monthly contributions.
Next, it’s a simple matter of adding and subtracting to make sure your income can fully cover your expenses and savings. Be honest with yourself. If your budget shows that you have an extra $400 each month but you regularly find yourself out of money, re-evaluate your expenses to make sure you haven’t underestimated your spending. On the other hand, if the numbers clearly show that your expenses are larger than your income, you know you need to look for cuts.
5. What’s the best way to make a budget really work?
Most people find that putting together a budget is enlightening. You might be surprised to learn how your monthly subscriptions add up, or how much you spend each month for takeout. Take the opportunity to evaluate how you spend your money each month and make firm plans to make changes if needed. But don’t stop there. Regularly monitor your spending against your budget throughout the year, and then adjust as needed.
Did you know?
There are dozens of personal budgeting apps and programs available; many for free. Some help you track your spending, giving you a real-time picture of how you are doing against your plan. Others help you plan for large expenses such as trips, planned car maintenance, home remodels, or medical procedures. Just do an online search for ‘budgeting software’ and choose the option that works best for you.
