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Published: May 10, 2023 15 min read
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In a world designed to make you spend, saving money is tricky. If you're in debt or have trouble keeping your spending in check, you might benefit from creating a personal budget — and more importantly, sticking to it. Budgeting will help you understand your spending habits, save for emergencies and pay off any lingering debts. It's the first step on the road to improving your financial health.

What is a personal budget?

A personal budget helps you understand the flow of your money: How much is coming in and how much is going out on a regular basis. More generally, a budget helps you make the best use of your money each month. Creating and sticking to a budget can reduce your financial stress by helping you control your spending. This creates more opportunities to save for retirement or build an emergency fund. A budget will also help you determine how to get out of debt.

By tracking, understanding and utilizing every dollar you have, you'll gain control over your personal finances and learn ways to improve your credit score. Budgeting takes dedication and restraint, but the benefits include financial freedom and security.

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How to make a personal budget

Budgeting can be accomplished using a range of strategies, depending on your preference. Some of these budgeting methods include the following:

  • Jotting down your expenses with pen and paper
  • Finding budgeting templates online
  • Setting up a spreadsheet to create by yourself
  • Downloading a budgeting app
  • Subscribing to budgeting software

All of these methods will make organizing your finances more manageable. Whatever your preferred budgeting method, here are some ideas to help you generate better financial opportunities.

Set attainable short-term goals and long-term goals

Setting goals is a vital part of budgeting, and it’s also a good money-saving hack. Short- and long-term goals can help supply some of the motivation needed to stick with a budget. Let's say you’re planning on a Caribbean vacation at the end of the year or you hope to buy a new TV once you've zeroed out your debt. Staying focused is easier when you have something to work toward. This can make cooking dinner at home — instead of ordering another pizza — much easier.

Short-term goals vary but should take three years or fewer to achieve. Some goals will be more important than others, like creating an emergency fund or paying off your credit card debt. Short-term goals that are more fun can also be motivating. These goals may include saving for a big purchase, vacation or an investment. You should also set some long-term goals, which can take anywhere from a few years to a few decades to accomplish. Some long-term goals might be putting money into a retirement fund or saving up for a down payment on a house.

Both short- and long-term goals can be adjusted depending on your situation. The goals you set should motivate you and improve your financial situation.

Add up all sources of income

When you start coming up with the numbers for your budget, you'll first want to determine your net income. Your net income is the amount of money you bring in after deductions from taxes, health insurance premiums and retirement plan contributions. Once you've come up with your net income, you'll have an accurate amount to budget for each month.

It's fairly easy to find your net income if you have a consistent salary. If you are self-employed as a freelancer, contractor or gig worker, estimate how much you expect to earn each month after taxes and business expenses. This might be difficult if your income fluctuates on a month-to-month basis, so try averaging your last year's worth of income. Take that amount and use it as a baseline for your monthly budget.

If you're eligible for additional income in the form of child support, disability, Social Security or any other payments, you'll want to factor this into your net income, too.

List all of your monthly expenses

After coming up with your monthly amount of after-tax income, you'll need to determine your monthly expenses. Determining your monthly and household expenses can be challenging. Get a better idea of your expenses by reviewing your last few months of bank or credit card statements. Also, begin jotting down any transactions as they occur.

When you subtract your total expenses from your net income, you'll want your final total to be positive. If it's negative, you're heading for debt. Get your finances back in a positive place by making a list of needs — such as food, shelter and clothing — and cutting wants — such as eating out, entertainment and nonessential items.

Create personal budget categories

One easy way to understand your spending habits is to look through your bank and credit card statements, and any online payment services, such as PayPal or Cash App. These payment platforms list how much you've spent and what you spent your money on, making it easy to categorize and total up.

Separate your expenditures into two categories: fixed and variable expenses. Your fixed expenses are costs that don't change month to month. These are often payments for your insurance, mortgage, car, utilities and subscriptions, even though the costs may vary slightly. Variable expenses tend to fluctuate from month to month. Some variable expenses are groceries, medical expenses, online purchases, eating out and credit card fees.

Deciding which expenses are needs and which are wants is an excellent place to start. Look at your list of wants and decide where you can eliminate items. Listing your expenses will give you a clearer idea of where to reduce impulse purchases, cut costs and save money.

Choose a budgeting method

Budgeting isn't always as easy as subtracting expenses from income. Life is complicated and different budgeting methods suit different lifestyles. One popular method is percentage-based budgeting.

If you use a percentage-based budget, you must categorize your monthly expenses to find your needs, wants and savings goals. You then take your net income amount and divide it up by a chosen percentage to find out how much you will put toward each category. One common way to divide your earnings by using the 50-30-20 rule:

  • 50% of your income toward your needs
  • 30% toward your wants
  • 20% toward savings or paying off debt

These percentages aren't one-size-fits-all, and you may need to adjust them to your situation. If you have significant debt, consider putting more money toward debt and spending less on your wants.
If a percentage-based budget doesn't appeal to you, try zero-based budgeting. This method asks you to assign a dollar amount to each spending category at the beginning of the month. As you spend, you track where your money is going. When a category reaches zero, you cannot spend another dollar on that category until the next month. Although it may seem extreme, it's an excellent method to combat overspending — as long as you don't cheat!

Another option is the envelope budgeting system. Like zero-based budgeting, you determine how much you'll spend in each category at the beginning of the month. Instead of tracking spending to determine how much you have left, you withdraw an amount of cash for each estimated expense and fill envelopes. When an envelope is empty, you won't be able to spend any more in that category. Using cash may be annoying for some, but it's an excellent way to make your spending tangible and visualize how much you have left.

Adjust your budget plan as needed

A budget isn't set in stone. It's a living document. Your original plan may be too flexible or too strict to help you attain your financial goals. Feel free to make adjustments month to month to find the right balance.

You should review your monthly budget, and decide where it was a success and where it could use some tweaking. You may find that certain expenses categorized as needs are in fact very strong wants. Other times you may realize that you're putting too much money toward paying off your debts, making your life uncomfortable.

You also should remember that your needs and costs will evolve over time. As your debt shrinks or you meet certain savings goals, you will have more money to assign to new goals or wants.

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The benefits of using a personal budget plan to manage your finances

Budgets are positive tools for personal finance. They offer a range of benefits and help you better control your money. Some of the pros to making a personal budget include the following:

Simplified and consistent debt repayments

Learning to use a budget effectively means that fixed expenses — rent, utility bills and any regular credit card payments — no longer catch you by surprise. You’re prepared for them to occur, and your new, more disciplined spending habits mean you’ll have the money to pay them.

Improved spending habits

Learning to live within your budget has some great benefits. First, you'll become less susceptible to overspending. Putting an end to overspending means you’ll have more money to put toward debt and savings. Financial stability brings peace of mind, as it will reduce your stress levels and allow you to worry about other things.

Building up your emergency savings

Getting control over your spending and saving may take time to get used to, but if you stay committed you'll see the results in your bank account. You won't have to worry about emergencies or unexpected events. By planning ahead, you'll already have money tucked away just in case anything happens.

The drawbacks of a personal budget

Budgeting does carry some cons, but they have more to do with your personal feelings of handling money and the growing pains of learning a new skill than actual drawbacks.

You’ll have to get used to budgeting

Your spending limits may initially feel inflexible and limiting. If you’re used to spending automatically, you may go through an adjustment period where it feels constricting to stop and question whether your budget can accommodate a random expense.

A budget requires some discipline

You'll need to exercise some impulse control to make your budget work. Some days, it may be very tempting to sink back into your old ways of spending, and you'll have to fight that urge.

You’ll need to pace yourself with realistic goals

You might get overly enthusiastic and either save or spend too much at the beginning of the month. If you set unrealistic goals, you'll struggle throughout the month and add stress to your life, even if you save money.

Budgeting without the right balance can lead to failure, so it's important to create a budget that fits your financial situation.

3 personal budgeting tips

To assist you on your journey, here are a few tips that can help you ease into budgeting and find the most suitable method for you.

1. Experiment with online budgeting tools and personal budget apps

Even if a particular budgeting method seems to work for you, don't be afraid to experiment and try more than one. All methods can be effective, but some will work better with your lifestyle.

If you find planning and maintaining a budget challenging, try using software or a budgeting app. Some apps link directly to your bank account and automatically categorize your expenditures into categories. You may need to do some general maintenance, but you'll be able to scroll through your phone and get a snapshot of your spending with minimal effort.

2. Set up automatic bill payments

Automating your payments is an excellent way to keep your payments on track and can be a great tool for budgeting. You can automate loan and credit card payments for a day or two after you get paid, so you don't need to worry about it for the rest of the month, and your bills won’t add up without your knowledge. You'll want to set up automated payments directly through your lender or the company you're paying.

You can also automate transfers from the account that receives your paycheck to other savings accounts. If you immediately transfer percentages of your salary into savings accounts that contribute to your goals, you'll know immediately how much money you have to spend for the month.

3. Get rid of unnecessary expenses

Make sure you get rid of all unnecessary expenses. To do this, you must prioritize your spending and cut unnecessary costs. Check for unexpected expenses, as well. Comb through your credit card statements to see if you’ve forgotten about any online subscription services you don’t use but are still paying for each month. These monthly costs seem inconsequential, but remember that every little bit saved adds up over the long term.

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Summary of Money's how to create a personal budget

Creating a personal budget is one of the best money moves you can make. It's an effective way to improve your financial health. With thoughtful planning, experimenting and adjusting, you can find the budgeting method that works best for you. If you stick to a budget, you'll be better equipped to reach your financial goals.