How to budget money

In a nutshell

Budgeting is a challenge for many people, but it’s important to control your finances.

• When you follow a budget, you’re proactively telling your money where to go each month instead of being reactionary.
• This helps you reach your goals and prevents mindless spending that hurts your finances.
• Here’s how to budget money using two popular budgeting strategies: the 50/20/30 rule and the 70/20/10 rule.

How to budget money

The first step in budgeting money is to track what and where you’re spending today.

Keep a log of every dollar spent for 30 days to see how much you’re spending and on what items. For many people, this exercise opens their eyes to frivolous spending that isn’t aligned with their goals. And it creates opportunities to reduce spending that can be used to pay down debt, build an emergency fund, or invest for the future.

Next, make a list of all of your mandatory monthly expenses, such as:

• Mortgage or rent payments.
• Auto loans, student loans, and other loan payments.
• Minimum payments on credit cards.
• Utilities.
• Insurance premiums (monthly or annual payments).

Then, use your 30-day tracking log to estimate how much you spend on variable expenses, like groceries, dining out, gasoline, entertainment, clothing, and others.

Compare the total of your mandatory payments and variable expenses against your income. Are you spending more than your take-home pay (also known as your net paycheck)? Or do you have extra money left over that you can use to increase savings or investments? In either situation, you may see opportunities to reduce your spending so that you have more money available to work towards your financial goals.

Budget strategies that work

There is no “right way” to budget that works for everyone. Based on our personal experiences, where we live, goals, and other factors, different budget strategies work for different people. Learning about budget strategies that work and then selecting the one that appeals to you is the best approach. Here are a few budget options to choose from:

1. Pay yourself first

With the pay-yourself-first strategy, you’ll set aside money from your paycheck first and then spend the rest. This way, you ensure that you’re meeting your savings goals. And you’re free to spend the remaining money however you’d like without any guilt.

To start, determine how much you want to save each month and subtract that from your paycheck. In some cases, part of this savings goal is subtracted from your gross paycheck through 401(k) or IRA deductions. Next, subtract your mandatory expenses; the rest is available to cover variable expenses and other items.

2. Creating a spending plan

For many people, “budget” is a four-letter word, and they resist attempts to "control" their spending. However, if you shift the mentality from being restrictive to something that's more proactive, people are more receptive to it. “Spending plan” not only sounds better than “budget,” it also emphasizes being in control of your money instead of your money controlling you.

To create your spending plan, you create goals and focus your spending to align with those goals. Of course, there are mandatory expenses, like housing, utilities, and debt payments, but you control where the rest of your money goes proactively.

3. How to budget money with the 50/20/30 Rule

The 50/20/30 Rule is a rule of thumb that breaks up your spending into broad categories. Then you have the freedom to spend money within those groups based on what's important to you. With this rule, your take-home pay is broken down like this:

• 50% on must-do expenses (housing, insurance, debt payments, groceries, utilities)
• 30% on wants (entertainment, dining out, travel)
• 20% savings (retirement plan contributions, college savings, emergency fund)

For people who have debt, the minimum payments are included in the 50% category. However, extra payments to reduce the principal and accelerate the debt payoff are part of the 20% savings bucket.

4. How to budget money with the 70/20/10 Rule

Another budget rule that breaks your spending into distinct categories is the 70/20/10 Rule. Under this budget strategy, your take-home pay is split this way:

• 70% on monthly spending (housing, utilities, debt payments, food, entertainment, clothing, travel, gas)
• 20% savings (emergency fund, retirement savings, college savings, investing)
• 10% debt payoff or charity

With the 70/20/10 Rule, up to 30% of your take-home pay is spent on your future self. This includes saving and investing for the future, as well as accelerating your debt payoff. Eliminating debt frees up your money to be more charitable. Charitable donations play a minor role in most budget strategies, but this strategy sets aside 10% for people who have repaid all of their debt.

A real-world example of how to budget money

Let's look at a real-world scenario for how to budget money. We'll use the 50/30/20 Rule to break down how it would affect someone's take-home pay.

For a family with a net paycheck (after taxes) of $7,000 per month, they'll have the following amount to spend each month:

• 50% on must-do = $3,500. Mortgage $1,500, car loan $500, credit cards $200, utilities $300, groceries $600, insurance $400.
• 30% on wants = $2,100. Dining out $600, travel $400, entertainment $400, gifts $200, other $500.
• 20% on savings = $1,400. Retirement plan $600, college savings $100, emergency fund $400, debt payoff $300.

The AP Buyline roundup: Feel good about being prepared

Thinking about how to budget money and sticking with it can be tough for some people. While budgets may feel restrictive, thinking of it as a spending plan may make it more palatable. There are numerous types of budgets, so it's okay to try different ones until you find the one that works best for you. The most important goal is to be in control of your money and ensure that your spending is helping you get closer to your goals instead of further away.