Budgeting 101

Budgeting 101: How to Budget Money

If I have take-home pay of, say, $2,000 a month, how can I pay for housing, food, insurance, health care, debt repayment and fun without running out of money? That’s a lot to cover with a limited amount, and this is a zero-sum game.

The answer is to make a budget.

What is a budget? A budget is a plan for every dollar you have. It’s not magic, but it represents more financial freedom and a life with much less stress. Here’s how to set one up.

How to budget money

  • Calculate your monthly income, pick a budgeting method and monitor your progress.

  • Try the 50/30/20 rule as a simple budgeting framework.

  • Allow up to 50% of your income for needs.

  • Leave 30% of your income for wants.

  • Commit 20% of your income to savings and debt repayment.

Understand the budgeting process

Figure out your after-tax income

If you get a regular paycheck, the amount you receive is probably it, but if you have automatic deductions for a 401(k), savings, and health and life insurance, add those back in to give yourself a true picture of your savings and expenditures. If you have other types of income — perhaps you make money from side gigs — subtract anything that reduces it, such as taxes and business expenses.

Budgeting 101
Budgeting 101

Choose a budgeting plan

Track your progress

Automate your savings

Automate as much as possible so the money you’ve allocated for a specific purpose gets there with minimal effort on your part. An accountability partner or online support group can help, so that you’re held accountable for choices that blow the budget.

Revisit your budget as needed

Your income, expenses and priorities will change over time. Adjust your budget accordingly, but always have one.

Before you build a budget

Track all your spending at a glance to understand your trends and spot opportunities to save money.

Frequently asked questions

How do you make a budget spreadsheet?

Start by determining your take-home (net) income, then take a pulse on your current spending. Finally, apply the 50/30/20 budget principles: 50% toward needs, 30% toward wants and 20% toward savings and debt repayment.

How do you keep a budget?

The key to keeping a budget is to track your spending on a regular basis so you can get an accurate picture of where your money is going and where you’d like it to go instead. Here’s how to get started: 1. Check your account statements. 2. Categorize your expenses. 3. Keep your tracking consistent. 4. Explore other options. 5. Identify room for change. Free online spreadsheets and templates can make budgeting easier.

How do you figure out a budget?

Start with a financial self-assessment. Once you know where you stand and what you hope to accomplish, pick a budgeting system that works for you. We recommend the 50/30/20 system, which splits your income across three major categories: 50% goes to necessities, 30% to wants and 20% to savings and debt repayment.

Try a simple budgeting plan

We recommend the popular 50/30/20 budget. In it, you spend roughly 50% of your after-tax dollars on necessities, no more than 30% on wants, and at least 20% on savings and debt repayment.

We like the simplicity of this plan. Over the long term, someone who follows these guidelines will have manageable debt, room to indulge occasionally, and savings to pay irregular or unexpected expenses and retire comfortably.

Find out how this budgeting approach applies to your money.


Savings and debt repayment

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NerdWallet tallies up your expenses and shows you how much you’re spending on things like food, bills, travel and more. Plus we’ll show you ways to save big.

Allow up to 50% of your income for needs

Your needs — about 50% of your after-tax income — should include:

  • Minimum loan payments. Anything beyond the minimum goes into the savings and debt repayment category.

  • Child care or other expenses you need so you can work.

If your absolute essentials overshoot the 50% mark, you may need to dip into the “wants” portion of your budget for a while. It’s not the end of the world, but you’ll have to adjust your spending.

Leave 30% of your income for wants

Separating wants from needs can be difficult. In general, though, needs are essential for you to live and work. Typical wants include dinners out, gifts, travel and entertainment.

It’s not always easy to decide. Is a gym membership a want or a need? How about organic groceries? Decisions vary from person to person.

If you’re eager to get out of debt as fast as you can, you may decide your wants can wait until you have some savings or your debts are under control. But your budget shouldn’t be so austere that you can never buy anything just for fun.

Every budget needs both wiggle room — maybe you forgot about an expense or one was bigger than you anticipated — and some money you’re entitled to spend as you wish.

Your budget is a tool to help you, not a straitjacket to keep you from enjoying life, ever. If there’s no money for fun, you’ll be less likely to stick with your budget — and a good budget is one you’ll stick with.

Commit 20% of your income to savings and debt repayment

Use 20% of your after-tax income to put something away for the unexpected, save for the future and pay off debt. Make sure you think of the bigger financial picture; that may mean two-stepping between savings and debt repayment to accomplish your most pressing goals.

Priority No. 1 is a starter emergency fund.

Many experts recommend you try to build up several months of bare-bones living expenses. We suggest you start with an emergency fund of at least $500 — enough to cover small emergencies and repairs — and build from there.

You can’t get out of debt without a way to avoid more debt every time something unexpected happens. And you’ll sleep better knowing you have a financial cushion.

Priority No. 2 is getting the employer match on your 401(k).

Get the easy money first. For most people, that means tax-advantaged accounts such as a 401(k). If your employer offers a match, contribute at least enough to grab the maximum. It’s free money.

Why do we make capturing an employer match a higher priority than debts? Because you won’t get another chance this big at free money, tax breaks and compound interest. Ultimately, you have a better shot at building wealth by getting in the habit of regular long-term savings.

Priority No. 3 is toxic debt.

Once you’ve snagged a match on a 401(k), if available, go after the toxic debt in your life: high-interest credit card debt, personal and payday loans, title loans and rent-to-own payments. All carry interest rates so high that you end up repaying two or three times what you borrowed.

  • You can’t repay your unsecured debt — credit cards, medical bills, personal loans — within five years, even with drastic spending cuts.

  • Your unpaid unsecured debt, in total, equals half or more of your gross income.

Priority No. 4 is, again, saving for retirement.

Once you’ve knocked off any toxic debt, the next task is to get yourself on track for retirement. Aim to save 15% of your gross income; that includes your company match, if there is one. If you’re young, consider funding a Roth individual retirement account after you capture the company match. Once you hit the contribution limit on the IRA, return to your 401(k) and maximize your contribution there.

Priority No. 5 is, again, your emergency fund.

Regular contributions can help you build up three to six months’ worth of living expenses. You shouldn’t expect steady progress because emergencies happen, but at least you’ll be able to manage them.

Priority No. 6 is debt repayment.

If you’ve already paid off your most toxic debt, what’s left is probably lower-rate, often tax-deductible debt (such as your mortgage). You should tackle these only after you’ve gotten your other financial ducks in a row.

Any wiggle room you have here comes from the money available for wants or from saving on your necessities, not your emergency fund and retirement savings.

Congratulations! You’re in a great position — a really great position — if you’ve built an emergency fund, paid off toxic debt and are socking away 15% toward a retirement nest egg. You’ve built a habit of saving that gives you immense financial flexibility. Don’t give up now.

If you’ve reached this happy point, consider saving for irregular expenses that aren’t emergencies, such as a new roof or your next car. Those expenses will come no matter what, and it’s better to save for them than 

https://www.nerdwallet.com/article/finance/how-to-budget

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