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A budget is a monthly plan you create that splits your money into categories and helps you manage your spending and savings. Budgeting is the first step in achieving your financial goals.

Why is a budget important?

  • Lets you identify how you spend money and where you can cut back on your spending.
  • Creates a black-and-white picture of your current financial situation and allows you to live efficiently within your limits.
  • Creates accountability–since you know where every penny goes, you learn to take control of your spending habits.
  • Gives you peace of mind–no more surprises when you look at your account balance.
  • Helps you actively prioritize your spending to achieve financial goals.

How to set up a budget

There’s nothing mysterious about making a budget. Simply come up with a number of spending categories, such as groceries, clothing, and dining out, target a spending limit for each category, and stick with your targets.

Instead of plucking target numbers out of thin air, track your spending for a few months, and then look for areas where you might be able to trim. (We’re looking at you, takeout.) And you don’t need to be a finance whiz to get started. A great many free apps and websites can be used to track your spending.

Here’s a step-by-step how-to guide to help you get started.

Step 1: Determine how much money you make each month. Include wages from your regular job as well as any income from investments or other work.

Step 2: Keep a journal to track your spending and savings. Be as thorough as possible.

Step 3: After a few months of tracking, add up your income and expenses for each month, and average them to see how much you typically make and spend. Be sure to include monthly payments on student loans, credit cards, or other debt.

Step 4: Compare average income to average expenses to see the overall picture.

Step 5: If you’re spending more than you earn or are just barely scraping by from month to month, identify unnecessary purchases and places to cut back.

Step 6: Set aside portions of your income for specific expenses. Start with a percentage of your income as a basic budget outline. Then convert that percentage into a dollar amount to make it easier to remember.

  • For example, if you want to spend 10% on groceries and you make $2,000 per month, you want your grocery budget to be 10% of $2,000, or $200.

Step 7: If you have more income than expenses, identify other financial priorities to work toward, such as:

  • Paying down your debts faster–making bigger payments means you’ll pay less in interest over time.
  • Building an emergency savings account.
  • Saving for a trip or major purchase.

Step 8: Reward yourself! Positive reinforcement is a powerful tool, so go ahead and treat yourself for staying within your budget!

Step 9: Revisit your budget every six months or so to make sure it still makes sense for you. If you switch jobs, get promoted, move, or do anything else that could change your income or expenses, go through these steps again to ensure you stay on track.

Budget Categories

Some common categories to include in your budget:

  • Groceries
  • Housing
  • Bills
  • Transportation
  • Health Care
  • Debt Payments
  • Savings
  • Specific financial goals (e.g., saving for a trip, investment, new home, or other important purchase)
  • Leisure
  • Flexible spending (e.g., unexpected expenses, charitable contributions, and other items that don’t necessarily come up every month)

Sample budget

Depending on your income and expenses, your budget may be different, but shown below is a good breakdown of what a basic budget should look like:

This super simple budget works pretty well for people with higher income–more money means more flexibility.

For example, If you earn $100,000 a year, you may not need the standard 30% of your income for housing. That 30% means you’d have $2,500 per month for rent or mortgage payments. Unless you live in New York or Los Angeles, you’ll likely be able to find suitable housing for less. Only needing 20% each month for housing means you have 10% more to devote to other things, so you have more for saving and leisure activities.

For people who earn less–the national average is just $46,000 per year–you might need to be a bit more specific, and you may have less room for long-term financial goals, nights out with friends, and other discretionary spending.

Look Ahead to Cut Costs

Almost everyone will need to cut some things out of their monthly spending to achieve long-term financial goals. The best way to determine what should go is to think about how an expense will add up over the course of a year.

For example

  • Buying a beverage at Starbucks every day for $3 may not seem significant for a month, but those drinks will cost you $1,095 over a year.
  • Buying a bottle of water may not seem like a big expense–what’s $1 for a little refreshment? But if you stick to bottled water and drink the recommended eight glasses a day, you’re spending about $1,400 per year unnecessarily. Tap water is basically free. You’ll save money, and it’s eco-friendly!
  • The average price of a movie ticket in the U.S. was $8.93 in 2017. If you see one movie every weekend, you’ll end up spending more than $464 per year, which doesn’t even count the cost of the popcorn and candy you’ll want to munch on during the film.

Make the most of your budget

Sticking to a budget takes discipline, but a few tips and tricks and a solid set of priorities can help you achieve your goals:

  • Automate your payments. Set up automatic payments for your credit card bills, phone bill, and utilities payments. Paying late means big fees, which can knock your budget out of shape pretty quick.
  • Use an app to help you track your spending and savings. An app can help you stay organized, remind you when bills are due, and automatically alert you if you start spending more, or saving less, than you should.
  • Whenever you make a purchase, compare the enjoyment you get from that item to how much you value reaching your goals. Does that blouse mean as much to you as being debt free? Do you need that expensive meal as much as you need a vacation?
  • If you have debt, prioritize paying it off over other goals, such as taking a vacation or saving up for a big purchase. Paying interest is a significant waste of money, and the faster you eliminate your debt, the less interest you’ll pay overall. So, if you have extra income each month, make bigger payments on your loans or credit card bills before you start focusing on other goals.

Speaking of goals . . .

Tips on budgeting for long-term goals:

  • Choose monthly or annual savings targets for each long-term goal on your horizon (such as retirement, a down payment on a house, or a wedding).
  • Start a different account for each goal, and then set up automatic transfers to fund each account every month. If the money isn’t in your checking account, you can’t spend it.
  • Make sure your savings targets are realistic. You’re more likely to stick with a long-term plan if it’s achievable.
  • Reevaluate your savings targets twice a year and any time you get a raise or cut expenses.
  • Give yourself a pat on the back every time you meet a saving goal, even if you only saved a small amount. Saving is hard!

Key takeaways

  1. A budget is a plan for how you spend money every month. It is based on your income and typical expenses.
  2. Budgeting is the first step for achieving any financial goal.
  3. To set up a budget, determine your monthly income and average expenses, and then pick a percentage of your monthly income to set aside for such categories as housing, groceries, and health care.
  4. Focus on paying off debt first, and then start saving toward other long-term goals.
  5. You can use apps and automated payments to help keep yourself on track.


Sticking to a budget isn’t always easy, but it will pay off in the long run. The first step is to determine how much you make and how much you spend. The goal is to spend less than you earn, and use the extra cash to pay off debts and save for other big goals, such as buying a house or taking a big trip. Luckily, budgeting gets easier the longer you do it. Plus, many online spreadsheets and mobile apps are already available to help you outline your budget and stick to it for good.

Fun facts

  • According to a study by, when people pay with a credit card, they spend around 50% more than when they pay with cash.
  • The word budget comes from the French word “bougette,” meaning “leather bag.”




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