Budgeting often gets a bad rap. Some people see it as restrictive, with rigid rules that mean you must deny yourself the little pleasures in life. Others see it as a hassle, requiring complicated setup and constant tracking. But a good budgeting system shouldn’t be either.
At its heart, budgeting is a way for you to be intentional about your money. It helps you understand your financial circ*mstances, behaviors and goals, and outlines a plan for achieving those goals. A budget can be as structured or as flexible as you want. The key is to find a budgeting system that works for you. Set realistic goals, prioritize spending guidelines that fit your lifestyle and stick with it.
Don’t know where to start? We’ll break down everything you need to know about budgeting and how to create one from start to finish.
What Is a Budget?
A budget is a plan for how you want to spend your money given your financial goals and circ*mstances. There are many different budgeting strategies, but the basic process is to:
1. Determine how much money is coming in.
2. Decide where you want the money to go based on your essential expenses and financial goals.
3. Create and follow a spending plan that gels with your income and expenses.
“Your budget should be created around the priorities of your family,” said Melissa Griswold, Associate Teaching Professor at the Robert J. Trulaske, Sr. College of Business. “There are no ‘right’ or ‘wrong’ budget categories or amounts. The goal is to live within your means while saving for a secure financial future.”
Why Is Budgeting Important?
Budgeting gives you a clear understanding of how much you’re making and spending each month and whether your spending habits align with your financial goals. It can help you organize your purchases so you’re not overspending in one category at the expense of others.
For a budget to be effective, you need to know why you’re making one. “If you’re budgeting because you think you should or someone told you to, you’re less likely to commit and follow through on the process,” said Kimbree Redburn, instructor at the Family Financial Planning Department at Montana State University. She recommends having a clear “why” for your budget — such as saving to buy a house or building up a financial cushion so you can reduce your work hours — to help you stay motivated to stick with it.
How To Budget
There are many different budgeting systems, but they all have the same foundation. “The main factor in creating an effective budget is a clear understanding of your current financial situation and your financial goals for the future,” said Artem Malinin, assistant professor in the Department of Data Science and Business Analytics at Florida Polytechnic University.
To create your own budget from scratch, you can follow these steps:
Calculate Monthly Income
The first step in creating a budget is to understand how much money is coming in and where it’s coming from. If you have a salaried job, look at your recent paychecks or checking account history to see how much you’re taking home each month after taxes and any pre-tax deductions.
If your income is unstable or you’re expecting to receive a bonus, don’t assume anything is a done deal until you receive the money. “A bonus is usually an extra inflow, not a guaranteed payment,” said Phil Uhlmann, Senior Lecturer of Finance at Bentley University. “Don’t go spending it until it is in your hands.”
Track Expenses
The next step is to look at how you currently spend your money.
“To make a budget successful, you need to take time to review your past spending,” said Redburn. “[Understanding] where your money goes will help you include all your essential expenses into your budget.”
While you may need to adjust your spending to reach your goals, a good budget should consider your existing expenses and lifestyle from the get-go.
Set Realistic Goals
A good budget isn’t about imposing arbitrary limitations on yourself. Rather, it’s about determining the financial goals that are important to you and, if necessary, reallocating your spending to help you reach those goals.
When setting goals, make sure they’re realistic. “There’s a risk of setting overly ambitious financial goals, which can potentially lead to a lack of motivation to maintain a budget in the future,” said Malinin. “It’s essential to ensure that your goal is achievable and can motivate you and your family to stay within the budget month after month.”
Put Together a Budgeting Plan
After you decide on your big-picture goals, put together a plan for exactly how you’ll spend your money each month. Decide how much you want to allocate for “needs,” such as rent or groceries, as well as “wants” like dining out or shopping. You should also try to set aside some money for savings and/or high-interest debt repayment each month.
Griswold recommends avoiding a “right” or “wrong” mentality when creating a budget. Being too restrictive can lead to a negative environment around budgeting. Instead, “allow yourself and your family members to create priorities and to develop budgeting goals around determined priorities,” Griswold advised.
And don’t forget to leave some money for fun in your budget. Otherwise, “your budget will feel too restrictive and you’re more likely to give up,” said Redburn. It doesn’t have to be much, but intentionally allocating a set amount to non-essential things that bring you joy can give you something to look forward to while ensuring you don’t overspend on impulse.
Adjust Your Spending
Once you have your budget, it’s time to make sure your spending actually matches your plan. There are many different ways to do this. Some people prefer to use apps or other technology to automatically document their spending or manually keep track of expenditures with a spreadsheet. Others like to divy up their monthly income into piles of cash for different budget categories and spend exclusively from those cash reserves.
Whichever method you use, the important thing is to make sure your spending in each budget category aligns with the target amount you set out in your original budget. If that’s not the case, figure out how you can adjust either your budget or your spending behaviors to bring the two back in line.
If unexpected circ*mstances arise and you can’t stick to your budget exactly, give yourself some grace. “Be sensible and recognize that a budget is a plan,” said Uhlmann. “Try to stick to it but recognize that some months are going to cost more than others. Don’t panic, just tighten your belt a bit the following month.”
Review Your Budget Regularly
A budget isn’t a one-and-done task, but rather an ongoing journey.
“Everyone should reconsider and rebalance their budget at least every six months,” said Malinin. In times when your finances are unstable or you’re anticipating big financial or lifestyle changes — such as retirement — Malinin recommends looking at your budget even more frequently.
You should also make a routine of smaller financial self-check-ins on a daily or weekly basis, said Julie R. Hollinshead, a part-time faculty member in the finance department at Wayne State University. This will help you measure how you’re doing and keep track of any upcoming expenses.
Budgeting Methods
If you’re new to budgeting, you may find it helpful to use a tried-and-true framework instead of creating a budget from scratch. Some of the most popular budgeting methods include:
50/30/20 Budgeting
The 50/30/20 budgeting method allocates your monthly income to three categories: 50% toward needs, 30% toward wants and 20% toward savings and debt repayment.
Needs are expenses you can’t live without, such as housing, healthcare and food. Wants are things that are nice to have but not absolutely necessary, such as dining out or entertainment. Savings is money you put aside and don’t spend for now, and can include contributions to a general savings account, emergency fund or retirement accounts.
You may want to break each category down further into specific components, such as rent, groceries, utilities, subscriptions and more. Housing costs will likely be your largest expense, and Uhlmann recommends limiting it to 30% or less of your monthly earnings.
The 50/30/20 budgeting method is great if you’re looking for a broad framework you can adapt to your specific needs. It may not work as well if you live in a high cost-of-living area and can’t meet your basic needs with only 50% of your salary. For example, 25% of American renters spent more than 50% of their income on rent and utilities alone in 2021, according to the U.S. Census Bureau.
Zero-Based Budgeting
The central premise of zero-based budgeting is that every dollar has a purpose. With zero-based budgeting, all your allocated expenses (including savings) should add up to your monthly income, leaving nothing unaccounted for. If you overspend from one category, you balance your budget by reducing your spending in another category. Although zero-based budgeting may seem like you’re living paycheck-to-paycheck since you never have any “extra” money left over, having a budget line item dedicated to an emergency fund, miscellaneous expenses or savings can save you from financial trouble if unexpected expenses arise.
Zero-based budgeting typically requires detailed tracking of expenses to make sure you’re not spending more than you allocated in any category. Because of this, it’s best suited for those looking for a very thorough and structured budgeting method and are willing to put in the time and effort to maintain it. It may not be as good for those who prefer a more flexible budgeting style or who don’t want to track every expense.
Envelope Budgeting
In its original form, envelope budgeting involves putting cash in envelopes dedicated to various spending categories and only spending from the allocated funds. Once you’ve spent all the cash in a given category, you can’t spend any more until you replenish your funds (usually on payday).
In addition to helping you stay on track with your budget, using cash has another benefit. “Psychologically, people tend to spend less when they see real money changing hands rather than just numbers changing on their mobile banking app when using a debit or credit card,” said Malinin.
If you don’t want to pay for everything with cash, you can keep the philosophy of envelope budgeting but create digital “envelopes” in your bank account or budgeting software. You’ll still set aside funds for each expense category and stop spending in that category once you use up all your funds.
Budget Calculator
Budget Calculator
Our calculator is based on the 50/30/20 budgeting method, which allocates your monthly after-tax income into three categories: 50% toward needs, 30% toward wants and 20% toward savings and/or debt repayment.
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Needs
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Wants
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Savings &
Debt Repayment
Needs
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- Housing
- Utilities
- Transportation
- Food
- Healthcare
- Childcare
- Insurance
Wants
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- Entertainment
- Gym Membership
- Vacation
- Electronics
- Clothes
- Shopping
- Furniture
Savings &
Debt Repayment
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- Retirement Savings
- High-yield Savings
- Credit Card Payments
- Student Loan Payments
- Additional Debt Payments
Please note, the expenses listed in each category do not represent every person’s expenses. Use them as a guide to tailor your budget to your individual needs.
Example Budget
Tips for Budgeting on a Low Income
When you have a low income, essential expenses may make up a larger percentage of your take-home pay, requiring you to cut spending elsewhere. Here are some tips for budgeting effectively:
Cut Out Unnecessary Expenses
Look at your spending and see if there’s anything you can cut out or cut back on. For example, you may find you can save money by finding cheaper alternatives to the things you commonly buy. Subscriptions are something else to watch out for, according to Ulhman, as these monthly costs might be automatically charged to your credit or debit card without you realizing and can add up quickly.
Daniel Hiebert, the director of the financial planning program at Minnesota State University, recommends having an honest conversation with yourself before making any significant purchases. “Consider a 12/12/12 rule,” he said. “If I buy this, will I be happy 12 hours from now, 12 weeks from now or 12 months from now?”
You can also target your largest expenses, which might net you more savings but require substantial adjustments to your everyday life. For example, you might consider moving to a cheaper area or getting a roommate to save on rent, or forgo a car and rely on public transportation if that’s feasible in your area.
Automate Your Savings
Hiebert recommends a “pay yourself first” mindset, where you set up automatic contributions to your savings or investment accounts as soon as you get paid each month and use the rest of the money for your expenses. This way, you’re less likely to find yourself in a position where you’ve spent your entire paycheck and have nothing to put toward savings at the end of the month.
Review your income and expenses to determine how much you can comfortably set aside for savings each month. Then, set up a system of automatic bank transfers or update your payroll elections so the money goes into a dedicated savings account before you have a chance to touch it.
Prioritize Paying Off Debt
If you have debt, it’s important to find a balance between paying it off and saving for the future. High-interest debt, such as credit card debt, can quickly balloon out of control if not paid down quickly.
“People often become so fixated on reaching their big goals (like buying a house, for example) that they fail to recognize that spending money from their credit cards is much more expensive than the potential savings they might have while maintaining a savings account,” said Malinin. “In this case, it’s better to pay off your credit cards first and then start saving for your bigger goal, rather than compromising by spending money from your credit card on everyday needs while also maintaining a savings account.”
However, there’s one exception to this: an emergency fund or rainy day fund. Aim to have at least one month’s expenses in savings so that if an unexpected expense arises or you lose your job, you have a financial cushion that can help you avoid taking on additional debt.
Conclusion
There are many sample budgets out there you can copy and budgeting philosophies you can use as guidelines, but the most important thing is to create a budget that works for you — your income, your expenses and your financial goals — and then follow through with it in your day-to-day spending.
Ultimately, “budgeting should be considered a journey, not a destination,” said Griswold. “A budget can only be impactful if it flows with the needs and priorities of the family. Budgeting is a lifelong journey that requires disciplined spending, yet flexibility and grace.”
Our Experts
Associate Teaching Professor, Robert J. Trulaske, Sr. College of Business at the University of Missouri
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What key factors make a budget successful, and how often should it be reviewed?
The goal of creating a budget is to create a plan that will lead to financial success. Successful budgets start with goal setting. Clearly identifying the “why” can help drive the budgeting process and help keep the family on track.Budgeting should be considered a journey, not a destination. Too often, families consider budgeting as a “to do” item that once complete, can be marked off the “to do” list. This mindset ignores the importance of constant monitoring and adjustments. A budget can only be impactful if it flows with the needs and priorities of the family. Budgeting is a lifelong journey that requires disciplined spending, yet flexibility and grace.
What are common budgeting mistakes to watch out for, and how can they be prevented?
A common mistake made when creating a budget is making the budget too restrictive. This creates a “right” or “wrong” mentality with your budget. This mentality should be avoided. Rather, consider the budget a work-in-progress. Allow yourself and your family members to create priorities and to develop budgeting goals around determined priorities. As a parent, work to avoid creating a negative environment around budgeting. If children think the budget creates hardship or bad feelings, this could have a negative impact on their “money personality.” Create an atmosphere of grace around your budget as life circ*mstances will surely result in overspending at times. At times, family members are reluctant to track all expenses. They overlook the fact that small expenses add up over time. For example, if your family consistently buys snacks at the ballpark, this needs to be used as a budget line item and tracked. This is important information for acknowledgement and potential adjustments to spending. Remember, your budget should be created around the priorities of your family. There are no “right” or “wrong” budget categories or amounts. The goal is to live within your means while saving for a secure financial future.
What strategies do you recommend for sticking to a budget and avoiding overspending?
Getting full buy-in from all family members is important. You need the entire family “rowing the boat in the same direction.” This requires collaboration and consensus among family members. In other words, identify the spenders in the family and get them on board. Let all members of the family have input on spending and saving priorities. Help children of all ages understand that there is an “inflow” and “outflow” equation that must be met. The use of real dollar bills can help children visualize this. Getting buy-in may require an understanding of why budgeting is important coupled with a reward for the entire family when budget goals are met! Lastly, don’t give up. Stay consistent and use a problem-solving approach when you overspend. Why did this happen? Do budget categories need adjustment or is this an outlier? Are there ways to plan ahead to avoid future overspending?
Dr. Griswold is an Associate Teaching Professor of Finance in the Robert J. Trulaske, Sr., College of Business at the University of Missouri. She earned her PhD from the University of Nebraska-Lincoln and has over 30 years of teaching and higher education administration experience. She is an entrepreneur, author, and public speaker.
Assistant Professor in the Department of Data Science and Business Analytics (DSBA), Florida Polytechnic University
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What key factors make a budget successful, and how often should it be reviewed?
The main factor in creating an effective budget is a clear understanding of your current financial situation and your financial goals for the future. Without these two components, it’s impossible to have a good budget. Once you have these factors in place, you can start outlining different scenarios based on the overall economic situation in the country or state. Additionally, consider your own work stability and anticipated changes in your personal life, such as plans to buy a house or change a car. During hard economic times or when your job stability is low, I recommend reevaluating your budget monthly. If no significant changes are anticipated in the future and your job situation is relatively stable, you can do this quarterly. Everyone should reconsider and rebalance their budget at least every six months. Moreover, as you get closer to retirement, it’s a good idea to reevaluate your budget more frequently to ensure you’re on track to achieve your financial goals.
What are common budgeting mistakes to watch out for, and how can they be prevented?
There are a couple of potential mistakes everyone should be aware of. First, there’s a risk of setting overly ambitious financial goals, which can potentially lead to a lack of motivation to maintain a budget in the future. It’s essential to ensure that your goal is achievable and can motivate you and your family to stay within the budget month after month. Secondly, there’s a behavioral bias called mental accounting that you need to be aware of as well. People often become so fixated on reaching their big goals (like buying a house, for example) that they fail to recognize that spending money from their credit cards is much more expensive than the potential savings they might have while maintaining a savings account. In this case, it’s better to pay off your credit cards first and then start saving for your bigger goal, rather than compromising by spending money from your credit card on everyday needs while also maintaining a savings account. Unfortunately, usually it doesn’t happen as most people will not spend money from the savings account that they labeled I their heads “house/car money” and rather overdraw their credit cards instead. Lastly, consider using technology. It’s always a great idea to stay ahead and utilize convenient tools that help you stay on track compared to the old-school approach of budgeting once a month without real-time visibility to track your progress. Nowadays, you can perform the same task in real time with the help of online banking apps that are always with you.
What strategies do you recommend for sticking to a budget and avoiding overspending?
I would recommend using cash, when possible, instead of credit cards. Psychologically, people tend to spend less when they see real money changing hands rather than just numbers changing on their mobile banking app when using a debit or credit card. Secondly, try to take care of your regular bills that you pay every month, such as mortgage, internet, and cable. It’s even better if you can automate those payments. In this case, it will give you a clear perspective at the beginning of the month regarding any spare funds you might have after taking care of all the necessary things first. Lastly, as you might know, it’s not a great idea to go shopping when you’re very hungry after a long working day. The same rule is very much applicable to your personal finances as well – give yourself at least 24 hours to think about bigger purchases instead of making impulsive decisions. This way, you can avoid unnecessary spending. These simple strategies will help you better manage your budget and stay on track.
Dr. Artem Malinin joined Florida Poly as an assistant professor in the Department of Data Science and Business Analytics (DSBA) in 2022. He started his career as a reporting analyst in a large investment bank in 2008. He also consulted for the oil and gas and government sectors during 2011-2012 and served in various analytical and managerial roles in the airline industry from 2012 to 2016 while being involved in his own business in 2015 and 2016. Following that, he worked to develop acceleration programs for tech startups in Houston, Texas from 2016 to 2018.
Senior Lecturer, Finance, Bentley University
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What key factors make a budget successful, and how often should it be reviewed?
A quarterly review of everything is a good idea. Put this date with yourself on your calendar. It’s critical to understand your cash revenues and any threats to the certainty of receiving those proceeds. If you have a salary that pays you every month, ask how sure you are that you will keep your job for the medium term. Ask if you might be laid off or terminated and assign a probability. If you are eligible for a year-end or periodic bonus, don’t go spending it until it is in your hands. I would look at your expenses every month. Make sure nothing extra sneaks in. I always look at the bigger items since they can bite. What constitutes a big expense depends on the person. For me, anything over $500 causes review, did I really need to spend that?
What are common budgeting mistakes to watch out for, and how can they be prevented?
As said, be sure about what is coming in. If you are eligible for a year-end or periodic bonus, don’t go spending it until it is in your hands. A bonus is usually an extra inflow not a guaranteed payment. If you work in the Finance industry, put your bonus in a savings account or pay down your mortgage. Subscriptions of any sort can become a problem. Health clubs that all of a sudden are charging your credit card $200 per month, magazines, entertainment debits, and the like add up quickly if you don’t pay attention. Avoid credit cards, make sure you can pay yours off every month. Try to limit yourself to one credit card, not three or four. Simple is better. Try to limit your housing cost to 30% of your base earnings. Try to limit total debt payments to 40% of your base compensation. Save something every month, 10% would be ideal but stick to the program and put money away. Over time this really adds up.
What strategies do you recommend for sticking to a budget and avoiding overspending?
Be sensible and recognize that a budget is a plan. Yes, try to stick to it but recognize that some months are going to cost more than others. Don’t panic, just tighten your belt a bit the following month. Save for vacations. Ideally, save for a new car. Don’t get ahead of yourself. Realize that stuff happens and then you need to have enough liquidity to handle these expenses.
Dr. Phil Uhlmann has been At Bentley University since 2003. He has also taught at the Fletcher School of Law and Diplomacy, Tufts University, the Bharti Institute of Public Policy, Indian School of Business, Mohali, India, and WU, Vienna. Prior to pursuing doctoral studies at Tufts, Dr. Uhlmann accumulated over 25 years of experience at the Canadian Imperial Bank of Commerce, primarily in Vancouver and Toronto. From 1992 to 1998, he held a senior executive position in CIBC’s Risk Management Division at the Head Office in Toronto. Dr. Uhlmann’s areas of interest encompass international finance, with a focus on banks and financial services, capital markets, country risk management, and international relations. He also possesses a particular interest in International Project Finance, including Infrastructure – Public Finance.
Instructor, Family Financial Planning Department of Human Development and Community Health, Montana State University
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What key factors make a budget successful, and how often should it be reviewed?
To make a budget successful you need to take time to review your past spending as you set up your budget. Reviewing your past spending to understand where your money goes will help you include all your essential expenses into your budget. And having these expenses included from the start will help you be more successful. Once you’ve built your budget, you should spend 15 to 30 minutes each week reviewing your spending to ensure you’re on track. These frequent check-ins will keep you focused and will also keep the task from getting so big that you don’t want to do it.
What are common budgeting mistakes to watch out for, and how can they be prevented?
One common mistake I see my clients make is to not leave any room for fun in their budget. If you don’t have some money set aside for fun, your budget will feel too restrictive and you’re more likely to give up. To prevent this, include fun money in your spending plan. It doesn’t have to be much, even $20 for brunch out with your friends once a month can give you something to look forward to while also making progress on your other financial goals.
What strategies do you recommend for sticking to a budget and avoiding overspending?
I think one of the best ways to stick to your budget and avoid overspending is to be crystal clear on why you’re budgeting in the first place. If you’re budgeting because you think you should or someone told you to, you’re less likely to commit and follow through on the process. If instead you have a clear why for creating your budget like you’re ready to save to buy a house, or you want to reduce your hours at work to spend more time with your kids, you’ll be motivated to stick to your budget. Then when you have opportunities outside your budget to overspend, you can come back to your why and think about what the overspending is costing you both now and in the future.
Kimbree is an Accredited Financial Counselor®, Financial Coach, and instructor in the Family Financial Planning Program at Montana State University. She has a master’s degree in International Economics and Development from Eastern Michigan University and a master’s certificate in Family Financial Planning from South Dakota State University. She loves educating others on how to take control of their money.
Part-Time Faculty in Finance, Mike Ilitch School of Business, Wayne State University
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What key factors make a budget successful, and how often should it be reviewed?
A budget or spending plan will only work if you follow it and use a system that is convenient for you such as a spreadsheet, an app, or a written budget. The key factors that will make your spending plan successful are making the plan realistic and flexible. Make your initial plan realistic by recording and reviewing past income, expenses, savings, and loan payment obligations; adjust it if a large, unexpected expense occurs and update it with more accurate information as you move forward. Track your actual income and expenses daily relative to your plan and you will become more aware of where your money is going. Often, daily recording and tracking results in less money being spent and the flexibility to dedicate more funds to building savings and long-term wealth.
What are common budgeting mistakes to watch out for, and how can they be prevented?
Some of the most common budgeting mistakes are abandoning a budget because of feeling overwhelmed and waiting too long to record your spending. Stave off the feeling of being overwhelmed by using a reputable secure app that can do a lot of the math and coordination of information for you. Make a routine of daily or weekly self check-ins to measure how you are doing, and to look ahead for upcoming payment obligations. Be sure to record spending every few days, if not every day, to guard against overspending. Use the convenience of credit cards wisely so you can pay off your credit card balance in full each month and avoid high interest rate charges which cause debt to spiral.
Julie Hollinshead teaches Personal Financial Planning and Portfolio Management at Wayne State University’s Mike Ilitch School of Business. She is a chartered financial analyst (CFA) and president of Hollinshead Advisory Services LLC, a financial and investment consultancy for individuals, private foundations and nonprofit organizations. For more than 25 years, she has worked in the investment management and banking industries, guiding investment portfolios and creating wealth for institutional clients and private individuals.
Director of Financial Planning, CPE, Assistant Professor, Finance/Financial Planning, Minnesota State University, Mankato College of Business
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What key factors make a budget successful, and how often should it be reviewed?
Making a budget successful requires not just a disciplined approach to tracking your spending but understanding that spending issues are usually a result of adverse buying behaviors. An example is impulse buying (a buying behavior where a person buys something on a whim without a plan or pre-contemplation). To combat this, consider creating a rule that says that you need to wait, for example, 48-72 hours before spending more than X amount on something you would like but isn’t necessary. Or have an honest conversation with yourself when you are contemplating a significant purchase “Will buying this really make me happy?” Along those lines, consider a 12/12/12 rule: “If I buy this, will I be happy 12 hours from now, 12 weeks from now?, or 12 months from now?”. Review: If you are having spending issues, consider reviewing your budget for every paycheck until your cash flow starts to improve. Then move to monthly, then quarterly. It’s worth noting that some people forgo a budget entirely and use a “pay yourself first” plan popularized by financial author David Bach in his book The Automatic Millionaire. The term refers to setting up automatic contributions into your investments and then living on the rest.
What are common budgeting mistakes to watch out for, and how can they be prevented?
Sometimes people get caught up in the minutia and end up giving up. Keep it simple, it can still be effective. This is where the Automatic Millionaire can be effective. Other mistakes are not focusing on the big categories like income taxes- making sure you are maximizing deductions and credits, possible debt refinancing, and insurance. These are some of the biggest expenses people have, and they represent some great potential opportunities to increase your cash flow. They also have a relatively minimal impact on a person’s lifestyle, like reducing your entertainment expenses would.
Daniel Hiebert is a financial planning expert with a Ph.D. in Financial and Retirement Planning and a Master of Financial Services from The American College. A Certified Financial Planner® (CFP®), he teaches estate planning, personal insurance, retirement planning, financial plan development, and business finance. Hiebert advises the Financial Planning student organization and researches family business succession, business valuation, and interpersonal skills for financial planners. He serves on the Financial Planning Association’s Career Development Committee and consults for the Mankato Small Business Development Center. His expertise includes business succession, interpersonal skills for financial planners, and retirement planning for business owners and solo entrepreneurs.
Professor of Business Economics and Public Policy, Wharton School of Business, University of Pennsylvania
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What key factors make a budget successful, and how often should it be reviewed?
I believe in budgeting just once a year or after a major life event, such as a change in job or unexpected costs. Use the budget exercise to determine a realistic level of contributions to debt paydown, retirement accounts, life insurance (if needed), and a raining day fund that is held in a separate high-yield savings account. Then, automate those contributions as much as possible using direct contributions from each paycheck. That is usually easy for retirement contributions, but you can usually set up a monthly recurring “bill pay” for these other purposes. Once these goals are met, then don’t worry about collecting receipts for daily spending — while doing so sounds like a good idea, people rarely stick to it for very long.
Kent Smetters is the Boettner Chair Professor at the University of Pennsylvania’s Wharton School and a Faculty Research Fellow at the National Bureau of Economic Research. Besides being a professor in Business Economics and Public Policy, he is also professor of Insurance and Risk Management as well as a faculty member in Applied Mathematics and Computational Science at Penn. His research focuses on applied theory, fiscal policy, risk measurement, insurance, health care, and personal finance.
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