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Learning to budget is an important step in your financial life. If you sometimes feel uncertain about how much to spend at the grocery store or whether you can afford to order takeout, buy new jeans or save for a vacation next year, a budget can take out the guesswork.
Budgeting helps you understand where every dollar you make goes. This knowledge and control of your spending can add up to a lot more financial freedom. If you're new to budgeting and unsure where to start, these resources will make creating a budget and sticking to it more manageable.
Why It's Important to Create a Budget
A budget is a plan for where your money goes. When you create a budget, you're estimating how much you'll make over a given period and deciding how that money will be allocated.
A budget helps you track your income and expenses, which is essential for financial health. With a clear overall picture of your finances, you'll be able to prioritize spending on the things you need and ideally afford more of the things you want.
When Should You Start a Budget?
Whatever your financial situation, a budget is essential to creating a clear picture of your cash flow each month.
It's almost never too early to start a budget. Here are some scenarios in which a budget can be especially beneficial:
- You've never budgeted before. Without a clear idea of your cash flow (the amount of money coming in and going out each month), you may be holding your breath when you open your banking app or wondering whether you make enough to set some money aside for saving toward your goals. A budget can relieve your financial stress by removing the mystery from your cash flow.
- You're saving for a goal. Setting a budget can help you prioritize big goals like buying a house, having a baby or going back to school. Not only will saving become more attainable when you keep a closer eye on your finances, but you'll also become more comfortable setting and plotting out your financial goals.
- You're struggling with overspending. When you don't have a plan for your money, it's easy to overspend. Taking an honest look at your income and expenses can help empower you to make important choices and stop spending impulsively. It'll also make it apparent when you've covered your necessities, debt and savings goals, so you won't need any justification to treat yourself when you've got the extra funds.
- Money is tight. If you're working with a low income, you may be avoiding budgeting because it's a source of stress. But budgeting is critical when you don't have much money to work with and can help you afford your expenses. It can even leave room for you to set aside money for savings. When cash is tight, budgeting can actually help reduce your anxiety because you'll have a plan for where to put your money.
- You're entering a transition. Major life changes such as changing careers, moving, bringing home a new pet, getting married or sending your kids to school can rock your financial world. Being in control of your finances will help you feel more stable, flexible and secure, which can make it easier to cope with the uncertainty of a significant change. Budgeting should also help you establish an emergency fund if you haven't already done so, which can remove much of the anxiety financial uncertainty can cause.
Resources on How to Create a Budget
Ready to make a budget? There's a variety of budgeting methods and tools to work with.
Budgeting methods are designed with different goals and philosophies in mind, and certain ones will work better for certain people. Here are a few of the most commonly used budgeting plans:
- 50/30/20 plan: This system uses the principle that 50% of your income should go to your rent, utilities and other non-negotiable expenses; 30% or less should go to discretionary spending; and 20% to savings or debt repayment. This method is a good starting point for creating a budget; once you've completed a few months using the plan, you may adjust your percentages for a budget that works better for you but still advances your priorities.
- Envelope system: Envelope budgeting is exactly what it sounds like: You physically withdraw cash from your bank each pay period and place it into various envelopes which represent categories of spending, like rent, groceries, shopping and transportation. This very tactile approach can help you combat overspending, but it might not work well for those who typically don't pay with cash.
- Zero-based budget: Like envelope budgeting, in zero-based budgeting, every dollar gets a specific task. You'll put every dollar you make into a category, like rent, debt repayment, savings, groceries or fun money. It's more labor-intensive than some other budgeting systems, but it may help give you the deepest understanding of your cash flow.
Whichever budgeting method you choose, our step-by-step guide to starting a budget can help you get down to business.
Budgeting apps are particularly helpful for creating and sticking to a budget, visualizing your overall financial situation, and tracking income and purchases:
- You Need a Budget (YNAB): YNAB makes zero-based budgeting easier by walking you through setting up your budget, syncing to your bank account and tracking your progress. It's an involved process, but it may pay off—YNAB says new users save an average of $600 in their first two months and $6,000 in their first year. It's one of the more expensive choices at $14.99 a month or $98.99 a year, but the 34-day free trial gives you a chance to try it out and decide if it'll work for you.
- Mint: Mint is a simple and free budgeting app with helpful features like bill pay and investment tracking. You can sync Mint with your bank account to track your spending and improve your financial health.
- Simplifi by Quicken: Simplifi by Quicken offers a snapshot of your cash flow and includes the option to set up a spending plan. Its features aren't as robust as some other options, but it's an affordable basic budgeting app at $5.99 per month or $47.99 per year and comes with a 30-day free trial.
The Bottom Line
However you choose to budget your finances, be sure to stick with your budget for the long haul. Controlling your income and expenses over time can help you manage debt and meet your short- and long-term financial goals.
For a more complete financial overview, monitor your credit with Experian's free credit monitoring, which lets you see how your credit utilization, payment history and other factors affect your credit. This can help you balance your credit score goals with your savings goals for more robust financial health.