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Do you ever wonder where all your income goes and why you sometimes come up short at the end of the month? If so, you may want to consider making a personal budget. This strategy can give you more control over your finances and make it easier to save money and pay off debt.

Learn more about what a budget is, why you should create one, how to budget money and which budgeting money tips you should consider.

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What is a budget?

A budget can serve as a financial plan for how you’ll spend and save your money over a certain period of time (usually a month). It’ll help you determine whether your income can cover all your planned expenses. Additionally, you can use a budget as a tracking tool to keep on top of your spending.

When looking at budget worksheet templates, you’ll see that a monthly budget begins with a list of your typical income sources, like a paycheck from your job. Next, the budget lists monthly expenses grouped by category. These include rent, utility bills, groceries, transportation costs, health care and family-related items.

After you subtract your expenses from your income, you'll get a clear picture of your remaining funds for the month. You can use the remaining money to work toward achieving certain financial goals — for instance, you might put some cash toward an emergency fund or a retirement savings account, or you may be able to pay off some of your debts. If you end up with a negative number after subtracting expenses from income, it may be a sign that you should look into reshuffling your budget by finding new income sources or curbing certain expenses.

Why is budgeting important?

Having a budget can make it easier to keep track of monthly expenses and keep up with your financial goals. Not only can this strategy give you better insight into your personal financial situation, but it also can help you stay disciplined by showing you how to prioritize your spending.

Monitoring your budget can also aid in identifying bad financial habits so you can take action promptly. For example, say you budget $250 monthly for entertainment, but when you look at your budget, you realize you generally reach that amount by the middle of each month. This may indicate that you should avoid taking on further entertainment expenses that month (for instance, by sitting out that next trip to the movies).

Ultimately, budgeting can allow you to achieve your financial goals and experience less stress. Allocating funds appropriately and controlling costs can leave you with spare cash to spend on a vacation, dedicate to a retirement fund, use to pay off high-interest debt, build a down payment and more.

How to budget for beginners

Budgeting may seem tricky at first. However, you can follow some clear steps to determine your income, expenses and financial goals. You can then use a variety of tools for accurately tracking and updating your budget.

1. Calculate your total monthly income from all sources

To start budgeting your money, you’ll need to first figure out your total after-tax monthly income. Some potential income sources include regular hourly or salaried earnings, self-employment income, child support, government payments (like Social Security checks) and investment earnings. Checking pay stubs, bank statements and other documents will help you identify these earnings.

As you add these items, you might encounter challenges with certain income types. For example, your self-employment income could vary widely from month to month based on the season, or the number of hours you worked may fluctuate. In these cases, looking at your past earnings and finding an average amount can help. In the case of self-employment income, you’ll also need to estimate the taxes yourself and deduct them from the amount you bring in.

2. Categorize your monthly expenses

The next step for building a budget includes determining your expenses so you can categorize them. These include both fixed and variable expenses that occur monthly as well as periodic costs, such as insurance, that you may pay only a few times a year. Review bank and credit card statements, bills and receipts to verify all the amounts.

Once you've identified your expenses, you'll want to divide them into categories. The following are some common categories to use (and some items that might be included in them):

  • Housing: Rent or mortgage, insurance and utilities
  • Health: Doctor and dental visits, health insurance premiums, medications and supplies
  • Food: Groceries, restaurant meals and delivery services
  • Child-related costs: School tuition, activities fees and child care costs
  • Pets: Food, supplies, vet care and pet insurance
  • Transportation: Public transportation fees, parking, car payment, insurance, gas and maintenance
  • Entertainment: Streaming subscriptions, local events, movie tickets and books
  • Gifts: Gifts for special occasions and charitable donations
  • Other required debt payments: Student loans, home equity loans, credit cards and personal loans
  • Other expenses: Personal care services, clothing, cosmetics, electronics and vacations

3. Set budgeting goals

Have some short- and long-term goals for budgeting money so that you know how to allocate extra cash. Perhaps you’d like to build an emergency fund to cover unexpected expenses or a savings fund to pay for an upcoming wedding or vacation. Some longer-term goals could include saving enough for your children’s college or your retirement or paying off all your debts.

Make sure to set realistic goals with specific dollar amounts. Additionally, try to come up with a deadline for reaching your goal so you can calculate how much money to allocate to it monthly.

4. Follow the 50/30/20 budget method

When researching how to create a personal budget, you’ll often hear about the 50/30/20 budgeting method. With this method, you dedicate 50% of your income to needs, 30% to wants and 20% to savings. To use this budgeting strategy effectively, make sure to properly categorize expenses into these three categories. While your specific expenses will vary, these common examples may help guide you:

  • Needs: Fixed expenses like housing, groceries, transportation, health care, insurance and child care
  • Wants: Discretionary spending like on entertainment, gifts, vacations, restaurants, personal care and clothing
  • Savings: Debt repayment, investments, retirement and savings accounts
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5. Make changes to your spending habits

With your budget set, you may want to begin changing your spending habits so that you don’t exceed the allocated amounts. Stick to the items you have on your budget and try to avoid unnecessary purchases. It also helps to identify issues that may lead to overspending, such as emotional shopping or overpaying for services due to convenience.

Carefully track your purchases, as well. You can compare the amounts spent against your budget regularly to identify areas where you tend to overspend — and make changes accordingly.

6. Use budgeting tools to track your spending and savings

You don’t need fancy software in order to budget — paper and pencil will do just fine. But if you think it’d help you stay organized, you may want to consider looking into budgeting spreadsheets or apps to more efficiently track your finances. Spreadsheets can provide a simple option for comparing planned expenses against actual ones, but they often require manual data entry and formatting. The best budgeting apps offer improved functionality for both budgeting and saving money and can automate some of the work.

These apps sometimes connect with your bank and credit card accounts to automatically identify transactions, categorize them and display real-time financial data. The apps often provide alerts if you risk overspending and may even show personalized tips for budgeting money. They might also let you set savings goals or automatically move funds between accounts.

7. Review your budget from time to time

Your budget should evolve as your financial goals, income and expense amounts change, so review it occasionally. If you receive a raise, incur a new expense or pay off debt, update your budget accordingly. Along with changing the affected budget line items, recalculate your total income and expenses to determine the cash remaining.

As you review your budget, take time to check for problem areas, too. Maybe you’ve consistently spent too much on a particular type of expense and need to decide whether to try to cut the cost moving forward. And don’t forget to keep your long-term financial goals in mind.

How to budget money on a low income: the top 4 tips

Budgeting on a low income comes with challenges because covering basic living expenses can leave little to save. But by following some budgeting tips, you can target expenses and debts to cut, get creative with additional income sources and save what cash you can.

1. Reduce your monthly expenses

While some living expenses offer less flexibility, you may be able to save money by cutting out unnecessary expenses. These might include unused streaming subscriptions, costly restaurant meals, expensive clothes, forgotten gym memberships or unnecessary gadget upgrades. You could try buying secondhand clothes, eating at home more often or seeking free entertainment.

Even essentials like utilities can provide opportunities for savings. If you have a tendency to leave lights on, don’t set your thermostat optimally, use too much water or have energy-inefficient appliances, these bills can get inflated. Considering efficient appliances and home improvements, using utilities wisely and monitoring your usage can help save money. You can also try negotiating with your service providers.

2. Earn extra money at work or start a side hustle

Boosting your income can help cover necessary costs or increase your budget’s surplus. Consider starting with your current job. You can try to take on extra hours, boost any commissions available, negotiate a raise with your boss or even consider a new position.

Taking on other gigs can bring in cash in your spare time. For example, you could deliver food or groceries, give people rides, offer freelance services, tutor students or sell items online. Passive income options such as renting out part of your home or selling online courses can also help. You could also try finding a regular part-time job, but you may find this less flexible than self-directed alternatives.

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3. Pay off high-interest debt

Because high-interest debt payments can make it hard to budget your money, you may want to prioritize paying those off to make room for other expenses and goals. While the issue can occur with other credit products, credit cards stand out for often having high rates. You can review your monthly statements to identify which of your accounts cost you the most.

You can then choose a strategy for paying these debts down. You may want to try the so-called “avalanche” method, which involves paying off the account with the highest interest rate first and then moving on to the debt with the next-highest rate. The alternative “snowball” method instead involves paying off balances from smallest to largest — but may lead to you incurring more long-term interest.

4. Automate your savings

Even on a low income, you should explore automatically setting aside at least a small amount toward savings each month. Doing this as soon as income arrives will make saving money a priority and discourage you from using the funds on unnecessary purchases.

There’s actual behavioral finance research on this. Present bias is the tendency to seek instant gratification over larger potential benefits for the future. Automating your savings can help reduce the temptation to spend the money now.

Consider opening a designated bank account to keep your savings separate from the money you use for everyday bills. Having this account will make it easier to track how you're spending your savings later, too. (While several options exist, you might want to look into money market accounts and high-yield savings accounts, as they currently offer the benefit of higher interest rates than regular savings accounts.) You could have your employer directly deposit part of your pay into that account and the rest into your main account.

Other options include setting up periodic account transfers with a bank or participating in a savings roundup program, which involves rounding up your bank account purchases to the nearest dollar and saving the spare change.

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Summary: How to budget money

While learning how to budget money better takes time and practice, gaining better financial control and achieving your financial goals make it worth it. By having a budget, you’ll better understand how much you earn and spend each month so you can work on changing detrimental spending habits. Good budgeting habits can also help you eliminate high-interest debt, saving you money in the long term.

As you plan how to spend and save money, consider learning about what a financial advisor is, as they can offer valuable advice. An advisor can look at your finances to help you come up with creative ways to budget and save money. Additionally, they may be able to offer guidance on how to pay off debt, plan for retirement, choose investments, minimize taxes or take advantage of insurance products.