The Ultimate Guide to Budgeting

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In a consumer culture where we are bombarded with opportunities to spend money, whether it’s picking up a latte on the way to work, or splurging on a favorite retailer’s online sale, it’s easy to lose track of our money.

While creating and maintaining a budget is rarely how anyone wants to spend their free time, it is foundational to managing money.

“Everyone, no matter their financial situation, should have a budget in place,” said Rachel Kampersal, a marketing communications and program associate with American Consumer Credit Counseling.

Budgeting your monthly income can help you with everything from setting financial goals to making sure that you pay your bills on time and in full.

When you don’t budget your money, you are likely to overspend, said Melinda Opperman, executive vice president of Credit.org.

“A lot of people feel they simply don’t have enough money and think budgeting would be a waste of time, but budgeting helps people break even or even come up with extra money for savings and goals,” she said.

Those savings goals could be long-term, such as retirement, or for upcoming expenditures such as a new kitchen appliance, a down payment on a house, or a big vacation.

Budgets don’t have to be complicated, and there are plenty of tools to help you get started. The key is to find a budgeting strategy that works for you and stick with it.

5 budgeting tools to keep handy

An important component of any budgeting system is planning and keeping track of your expenditures, whether you are entering them into an app or spreadsheet, writing them on a paper calendar, or saving your receipts in a shoebox and tallying them on the weekend.
“Be sure to write a ‘receipt’ for everything you spend, including things like vending machines,” Opperman said.

“This is an individual process, so it’s important to try multiple tools until you come up with something that works for you,” she added. “A lot of people today might benefit from specialized budgeting apps, but there are still many who might prefer to keep track of their spending in a written journal.”

One convenient way to keep track of your budget is through an app or online budgeting tool that can help you manage your earnings and spending. Here are five to consider:

1. Mint

This free app, which is owned by Intuit, provides users with a comprehensive overview of their finances. Like many budgeting tools, Mint allows you to connect to your bank account from your mobile device and manage bills, build a budget with detailed categories, track spending, and analyze cash flow.

One of Mint’s best features is that it allows users to pay their bills — including credit card and utility bills — directly from the app. This adds another level of organization to a budget, as users can see what they owe, pay it, and see how the payment has affected their cash flow, all in a few clicks. For those who like a detailed analysis of their monthly spending and saving, Mint also provides charts and graphs and additional financial information, such as the current value of your house and your credit score.

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2. Pocketguard

This app, which is free, is marketed as a simpler approach to budgeting, and it does a lot of the initial set-up work for you. After you provide information for PocketGuard to sync up with your bank accounts, it analyzes your transactions and divides them into “pockets” based on repeated bills and charges it finds (you can manually correct any miscategorized items). After you enter spending limits for each category, the app lets you know how much money you have left in each category — a helpful feature when you need to know whether a purchase is within your budget.

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3. You Need a Budget (YNAB)

While this app is fee-based, many find it worth the price — it’s one of the most highly rated budgeting apps on the market. It asks users to set up a budget by “giving every dollar a job,” or assigning all of your income into categories that you create. YNAB encourages users to be intentional with their money and create categories for recurring and occasional large expenses. That way, when a large bill comes in for a car repair or a vacation, the money already has been allocated for it.

You can try YNAB for 34 days for free, and after that it costs about $5 per month, or $50 per year. Along with the app, the fee will give you access to helpful personal finance videos and resources, as well as an online community.

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4. HomeBudget

When budgeting is a family affair, HomeBudget is a great app to keep track of an entire household’s spending. Through its unique Family Sync feature, each family member’s income and expense transactions can be synced from their devices into one budget.

The app also allows you to track bills and payments due and correlate categorized transactions with your bank and credit card accounts. As of the date of publishing, the app currently costs $5.99 on Amazon App Store and has a monthly fee of about $1.66. You also can download a trial version before committing.

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5. Spendee

This easy-to-use app keeps it simple. It connects with your bank accounts to automatically enter expenditures into your budget (you can enter transactions manually, too), and then it creates infographics to help you understand and keep track of your spending and income.

The app costs $1.99 per month as of the date of publishing.

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How to create a budget in 5 simple steps

You do not have to have a college degree in accounting to set up a personal budget. You’ll need to collect some personal financial information first, and then figure out which budgeting strategy is best for you.

1. Determine your monthly income

This first step is short simple: Find out how much money you bring in each month. Track down your paychecks from the past few months for a more accurate picture.

If you are married or sharing expenses with a partner, you’ll need to work together to figure out your joint income.

2. Track your expenses for a month

This should include everything from big expenses, such as your mortgage or rent payment, to your “fun” money for eating out or spur-of-the-moment purchases.

“If you sit down today and start planning your spending, you will miss all sorts of small expenses and you will be frustrated when your budget doesn’t line up,” Opperman said. “But if you diligently track all of your spending for a full month, then you will know all of the monthly expenses you can expect to face, and your budget will be more realistic.”

There are many ways to track spending; choose what fits with your lifestyle. Anything from a spreadsheet to a notebook will work.

3. Decide how much you want to save each month

Savings shouldn’t be only for known expenses, such as a wedding or planned home improvement. You’ll want to consider incorporating other “emergency” expenses into your savings calculations, such as replacing appliances or costly car repairs — that way, when the expense comes, you’ll be prepared.

There are several ways to figure out how much you’d like to save. You can decide on a percentage of your income or a dollar amount that you’d like to put aside each month.

4. Work in some ‘wiggle room’

No matter how carefully you track and forecast your spending, you will never spend the same amount each month — and you need to be prepared. “You might have particular months where you always spend more, like holiday gift shopping or back-to-school expenses,” Opperman said. “You have to plan for those variances in advance.”

In these situations, you may need to make sure that your budget is flexible enough to allow for extra expenditures when needed.

5. Choose a budgeting strategy

Once you’ve compiled your income and spending data and thought through your saving goals, it’s time to choose a budget style. Keep in mind that there is no right way to budget — any method that helps you manage your spending and save money will benefit you financially.

“A budget should be personalized and tailored to fit an individual’s or family’s needs,” Kampernal said.

Here are some strategies for budgeting:

Penny tracking

While the most detailed (and the most eye-opening), this method will show you exactly how much you are spending and leave no question as to whether you are living within your means.

To start, choose an amount for each category in your monthly budget. You can determine this from your month of tracking your spending or use financial experts’ guidelines. According to Kampernal, professionals’ guidelines include:

  • Transportation: 20%
  • Investments/savings: 20%
  • Housing: 35%
  • Debt: 5%
  • Other expenses: 20%

Once you’ve allocated your income into categories, you can begin entering each expenditure on a spreadsheet or online budget tracker. For example, if you bring home $3,000 every month and allocate $75 for eating out, you’ll mark every restaurant visit expenditure in this category — even that $1.69 soda you bought at the gas station. As the month progresses, you’ll be able to see whether you are on track to overspend or are staying within your “eating out” budget.

This method forces you to be accountable for your spending and provides a real-time picture throughout the month of where you are with your budget. If the consumer above has spent $60 on eating out by the 15th of the month, for example, he knows he’ll need to rein in the restaurant spending for the next two weeks to stay on budget.

Penny tracking can be tedious and doesn’t have to be a lifelong practice, but if done consistently, it will show you where you tend to overspend and how to realistically allocate your money. It can help you pay off debt, build savings, and develop realistic spending habits that could provide a lifetime of financial benefit. And if you ever wondered where all your money went, now you’ll know.

‘Leftovers’ budgeting

This type of budgeting is a little more relaxed than penny tracking, allowing you to lump your discretionary money into one category while still providing enough accountability to keep you from overspending.

Leftovers budgeting requires you to first pay your essential bills. Here’s an example of a budget for someone with a monthly take-home income of $2,700 (this is after taxes and a 401(k) contribution):

  • Rent/mortgage: $850
  • Utilities (power/water/sewer): $120
  • Cell phone: $75
  • Student loans: $250
  • Vehicle (monthly payment/insurance/gas): $250
  • Groceries: $400
  • Savings: $300

Your total monthly bills are $2,245. When expenses are subtracted from your income of $2,700, that leaves $455 for eating out, clothing purchases and any other spending you choose. Any discretionary funds leftover at the end of the month can be rolled into savings.

The envelope method

With this system, consumers assigned expenses to three categories of their budget following a 50/20/30 rule: Fixed bills (50%), savings and other financial goals (20%), and flexible spending (30%). You then monitor your spending within those categories.

For someone with a $2,700 monthly take-home income, that means fixed bills should total no more than $1,350 and savings and other financial goals should be allocated $540, leaving $810 for flexible spending — including groceries, entertainment and purchases.

The idea is that “when the money runs out, spending should stop,” Kampernal said. While you don’t have to literally put cash in envelopes for each category every month (the practice this style of budget is named after), you can imagine that when you’ve spent down a category to $0, the envelope is empty until it’s replenished next month.

Staying on track with your budget

No budget system will work if you cheat or stop paying attention to your spending — even for a few days. Here is some advice from budgeting experts on how to stick to your budget.

Keep it flexible: Unexpected expenses will crop up, which likely means you’ll need to re-evaluate your budget. Or, you may find yourself spending more in one category than you anticipated, and you’ll need to reduce another category to make up for it. “Stick to the process for a few months, making adjustments until you get the budget into a comfortable place for you,” Oppenheimer said.

Pay your debts off first: Debt payment can command a lot of your budget, and the faster you pay them off, the more quickly you’ll free up room in your budget for other spending.

Focus on paying off your debts up front. As you eliminate those obligations, you’ll have an easier time with the rest of your budget.

Automate your payments: Setting up automatic bill payments through your bank’s website for as many monthly payments as you can will ensure that those bills are paid on time and keep that part of your budget on track.

Consider going cash-only: Opperman said that many Credit.org clients benefit from living on a cash basis. “If people are struggling to stick to their budget, we suggest leaving the debit card at home,” she said. “This takes away the ability to afford unplanned purchases.” If you really want to buy something, you’ll be forced to think about it until you can return with your card.

An alternative strategy to limit impulse buying is to give yourself a pre-paid credit card or gift card with a small limit, Opperman said.

Be careful with credit cards: Credit card spending can sink even the most well-intentioned budget, especially if you are paying off debts.

Oppenheimer recommends making it a priority to end borrowing with credit cards, as you’ll only accumulate more debt — and throw off your budget.

“If you do use credit cards, you have to make it part of your budget that you pay off the balance in full every month — before the grace period, so you don’t add interest charges to your spending plan,” Opperman said.

Knowing how you are spending your money eliminates risk and allows you to take charge of your finances. Keep the long-term game in mind — disciplined spending now equates to more savings, and, thus, more financial freedom, in the future.

Give yourself a little freedom: If you stray from your budget, don’t give up or punish yourself, Kampernal said.

“Sometimes, life happens,” she said. “Allow yourself to make mistakes and aim to do better in the future. Budgeting is now an ‘all or nothing’ mentality.”

Give yourself a reward if you have a little space in your budget at times. Get that take-out meal or buy that small item you’ve had your eye on.

“That way, you don’t feel trapped within your budget, but know that discretionary spending is accounted for,” Kampernal said.

The most important factor in budgeting is that you do it. Take the time to organize your financial information, track your spending, and personalize a budget style to fit you or your family’s needs.

“No two budgets are equal, so make yours realistic and livable so you are more likely to follow it,” Kampernal said.

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Marty Minchin
Marty Minchin |

Marty Minchin is a writer at MagnifyMoney. You can email Marty here