How to Create a Budget — and Stick to It

Knowing how to budget your money is an important skill, but a lot of people clamp their hands over their ears at the mere mention of the word. Explore these strategies designed to help you make a budget and stick to it. Implement them in your life to stay on track and meet your financial goals.

Why You Need a Budget

There are many reasons to learn how to create budget. The first and most important reason is so that you know where your money is going. It can be easy to understand the big expenses — your car, your rent — but micro purchases can really add up over the course of a month or a year. 

The second biggest reason you need to learn to budget is so that you can save for important things — buying a house, taking a vacation, sending your child to college, eventually retiring — and big purchases that excite you — a new phone, computer, tattoo or fancy shoes. Without a budget, it’s difficult to do any of those things.

Pick a Budget/Savings Strategy

There are several ways to approach a budget. Which strategy you choose should depend on your and your family’s needs and wants. Here’s a snapshot of the four most popular budgets used by savvy savers.

Cash-only budget

Label some envelopes, put your credit cards in a safe and inconvenient spot, and go to the bank. With the cash-only budget, you spend only what you have in each envelope for each category each month — and let the rest accumulate in your checking or savings account.

60/40 budget

With the 60/40 method, 60% of your budget goes toward committed expenses. This includes necessities — rent, car, food, insurance — as well as things you don’t need but have committed to — gym membership, tutoring for your child.

The other 40% is split evenly among the following:

  • Short- and long-term savings
  • Retirement savings
  • Fun money

50/30/20 budget

An alternate take on the 60/40 budget, the 50/30/20 budget is broken up in a way that many people consider more realistic. The three categories are:

  • 50% mandatory expenses
  • 30% fun money
  • 20% savings

Compare Your Income and Expenses

No budget is realistic without a hard look at both your monthly income and monthly expenses. Create a spreadsheet and record everything you spend money on each month. Your line items will include:

  • Rent or mortgage
  • Car
  • Groceries
  • Utilities
  • Phone and internet
  • Car maintenance and fuel 
  • Clothes
  • Credit card bills

List out all your expenses (mandatory and discretionary) and compare the total to your income. Compare the difference to your savings goals. If you fall short of your goal, it’s time to take a hard look at your discretionary spending and see what you can cut.

Tweak as Time Goes On

Perhaps a $250 grocery budget wasn’t realistic with two teenagers in the house. Maybe you set aside too much for car maintenance and fuel. When your budget doesn’t work in real life, be willing to adjust it.

While you want to stay as true to your original budget as possible, it’s better to change things up than abandon it altogether. If you find that you were too optimistic about your spending, reassess your numbers and confirm your commitment. The most successful investors realize that change is constant.

And that’s what you’re doing when you create a budget: investing in your future.

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