The simple mantra of finance bloggers everywhere is “spend less than you earn,” but we know that this is easier said than done. This is where budgets come in.
What is a Budget?
A budget is a way to model how much money you make and where it needs to go every time you get paid. To make a budget, you add up what you earn (income) and add up all the bills and purchases (expenses)—this gives you a basic idea of how much you’re earning and how much you’re spending.
If you’re spending more than you’re earning on a regular basis, you may not be putting away enough savings for emergencies or a big-budget purchase (like a car or a house).
Budgets can help you clearly see where all your money is going and help you figure out where to cut back so that you can put more into savings or reduce your debt.
There is no "one size fits all" budget formula. Everyone is different and has different needs. Find a budget that works for you and stick to it. Here are some budgets that may work for you:
Basic Budgeting Method #1: The Classic Budget
Listing out your expenses, line by line, is a tried-and-true budgeting strategy.
Get started by listing all of your monthly expenses in rows. This includes the needs (your rent or mortgage payments, car payments and insurance, cell phone bill, groceries, etc.) and the wants (weekly drinks with friends, trips to the movies, etc.).
Then you’ll create two columns:
- Estimated spending (what you think you’ll spend)
- Actual spending (what you actually spent)
Fill how much you plan to spend in the “Estimated spending” column and how much you actually spent in the “Actual spending” column. Seeing the difference between estimated and actual spending will help you understand how much money you’re actually spending, and will help you plan for upcoming months.
For example, if you noticed that you spent $20 more on your phone bill than you planned to, you can look into this to learn why (maybe you need a different plan with more data or maybe you were overcharged).
You can do this budget on paper or you can use any spreadsheet program (like Google Sheets or Microsoft Excel) to help you create a classic budget sheet.
Basic Budgeting Method #2: The Cash-Only Budget
This method allows you to literally only spend the cash that you have. It’s often called the envelope method because you put cash in envelopes for different purposes.
To use the envelope method, you’ll figure out your major spending categories for the month, like groceries, dining out, gas, etc. You’ll use one envelope per spending category, and you’ll fill each envelope with the cash that you have for the month.
For example, let’s say your main spending categories for the month are food, gas, clothing, and entertainment. You budget $500 for food, $150 for gas, $100 for clothing, and $50 for entertainment. You’ll put $500 in one envelope, $150 in another, and so on. Then you’ll spend the cash throughout the month until it’s gone.
This strategy is really good for making you aware of your spending and ensuring that you can’t spend more than you have, which can be easy with credit or debit cards. The main drawback is carrying a lot of cash on you—if the money is lost or stolen, that’s it.
Basic Budgeting Method #3: The Percentage Budget
A less strict method is the percentage budget (also called proportional budgeting). This budgeting strategy gives you a loose guideline for spending your money instead of detailed tracking.
There are two ways to do the percentage budget:
- you set aside a certain percentage for spending vs. saving
- you set aside a certain percentage for needs, a certain percentage for wants, and a certain percentage for savings
The 80/20 budget is a percentage budget where you put 80% of your income towards expenses (both wants and needs) and save 20%. You don’t need to track which expenses go where, as long as you’re staying within that 80%.
The 50/30/20 budget is another type of proportional budget: you put 50% of your income towards needs, 30% towards wants, and 20% towards savings.
Whatever your percentages are, make sure you’re saving at least a little. It’s tough, but having savings gives you options when you need them.
Basic Budgeting Method #4: The Pay-Yourself-First Budget
Pay Yourself First budgeting focuses on savings by putting money towards your savings first, before you spend it. If you’re looking to bulk up your savings, this could be a good budgeting strategy.
To make this budget, you’ll figure out how much income you have every month, add up your monthly expenses, and then subtract them to find out what’s left.
Monthly income – regular monthly expenses = what you can send to your savings
If your regular monthly expenses are more than your monthly income, you’ve got to figure out how to reduce your monthly expenses, earn more money, or both so that some can go to savings.
A Save to Win CD may be a great place to put your pay-yourself-first money: it’s a certificate of deposit that you can add to regularly, with deposits qualifying for additional savings prizes!*
How Can We Help?
If you’re looking to budget to help add to your savings, add to your checking account! It’ll round up every purchase to the nearest dollar and deposit the difference into your savings account—every time you use your debit card, you’ll be saving automatically!
Not sure which budgeting method is right for you? Or do you have questions about budgeting? Check out BALANCE**, a program that provides financial education and access to debt and budget coaches. It’s free service we offer to our members!
*Members receive one (1) entry for every $25 increase in the monthly balance for the member in a Qualifying Certificate Account at month's end, with a maximum of ten (10) entries per month, per member. See additional disclosures here.
**BALANCE is not owned or operated by NWCU. BALANCE is a nonprofit certified by HUD to provide comprehensive housing counseling service and is accredited by the Council on Accreditation of Services for Families and Children, Inc.
