If you’re reading this, you may feel like the rise of inflation and the state of the economy is stressing you out (or at least, egging you on.) We totally get it. With the cost of essentials like gas and groceries gouging wallets steadily on the rise, knowing how to create a budget has never been more crucial for managing your finances.
But how many times have you tried to create a budget only to watch it fall by the wayside within weeks or even days? If you have yet to find a budgeting plan that works for you, don’t throw in the towel just yet. Luckily, budgeting is a skill you can learn through knowledge and practice. So if you’re ready to learn how to maximize your money’s potential each month, this guide can help you make it happen.
In this comprehensive guide to creating a budget for beginners, we’ll help you make an effective budget that you can sustain, no matter how many times you’ve tried and failed to stick to a budget before.
We’ll start with a simple overview of how budgets work. Then, we’ll go through each step of creating a budget from scratch using one simple, proven budgeting trick guaranteed to work, regardless of your income. Finally, we’ll review some common budgeting mistakes and how to avoid letting them throw you off track.
By the end of this article, you’ll understand how to build a budget that keeps working for you month after month.
Budgeting for beginners: start with why
Before diving into the details of working out your budget, take a moment to set your intentions. Many forget that budgeting isn’t just about saving a few extra dollars here and there—it’s a proven strategy to help you reach larger, long-term financial goals.
Why exactly do you want to make a budget? Maybe your first thought is something like, “I want to create a budget so I can finally pay off that credit card debt,” or, “I need to have something set aside in case of an emergency.”
If you try adding the word because after your first couple of answers, you will uncover your true motivation for budgeting.
For example, “I want to pay off my credit card debt because I want a better credit score. I want a better credit score because I want to become a homeowner someday.”
Here are some common reasons that motivate people to maintain a budget.
- Ending fights about money
- Relief from the chronic stress of living paycheck-to-paycheck
- Investing in a new home or car
- Saving money for tuition
- Becoming debt-free
Whatever your reason, write it down and let it be your driving force when things get tough, or you feel like quitting. By approaching your budget with a goal in mind, you’re more likely to stay committed to your plan.
Remember that a budget is more than just a list of your household income and expenses. It’s also a plan for slowly but surely growing your net worth and achieving your desired lifestyle over time.
The basics of budgeting
Any reasonable budget needs to consider three factors:
1. Income – the amount of money your household brings home after taxes.
2. Expenses – the things you must spend money on, like rent, bills, and food, plus the items you want to spend on, like restaurants and entertainment.
3. Savings – the amount you pay yourself and stock away for emergencies, planned purchases, retirement, and investments.
If you want to start creating a budget but are unsure where to begin, consider using a simple method like 50/30/20 for guidance on how to create a budget.
What is 50/30/20?
Here’s how it works:
1. You allocate 50% of your income towards your basic living needs, such as rent, mortgage, utilities, minimum credit card payments, etc.
2. You spend up to 30% on wants, such as new clothing, entertainment, vacations, etc.
3. You put 20% away into savings, investments, and paying off debts.
That’s it. Really—it’s that simple!
Where did the rule come from?
In 2005, Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi, wrote a book titled “All Your Worth: The Ultimate Lifetime Money Plan.” The book outlines over twenty years of financial research and proposes a simple budgeting and savings rule called the 50/30/20 rule.
As it turns out, the simplicity of Warren and Tyagi’s budget has been life-changing.
The moral of the story? You don’t need complicated financial gymnastics to balance your cash flow across your needs. Instead, budgeting can be easy with the right approach.
The 5-Step guide to creating a 50/30/20 budget
Now that we’ve covered the basics, creating your own 50/30/20 budget is time.
You’ll need the following:
- Access to your pay stubs and bank records from the last month. (You’ll want to have this info from your partner to create a budget as a couple).
- A calculator.
Ready to get started? You got this!
1. Add up your spending categories over the last month.
Before you dive into calculating how you should spend your money, it’s helpful to get an idea of your current spending.
Category #1 – Needs
You must pay for monthly necessities to maintain your quality of life, including food, housing, utilities, and transportation.
When totaling your necessary monthly bills, you must account for fixed and variable expenses. Here’s how they differ:
Fixed expenses stay the same month-to-month, such as your rent or mortgage, car payment, medications, etc. However, variable costs can change monthly, including your grocery bill, gas, and electricity.
To help you get started, we’ve put together a list of everyday expenses you might find in this category:
- Housing: this includes your mortgage or rent, property taxes, homeowner’s or renter’s insurance, and any required repairs or maintenance
- Utilities: water, trash, electricity, natural gas, telephone, and internet
- Transportation: car payments, auto insurance, fuel costs, public transportation fares, and vehicle repairs and maintenance
- Food: groceries, dining out, and delivery costs
- Childcare and education: babysitting, daycare, tuition, and after-school programs
- Healthcare: health insurance premiums, copayments, and required medications
- Personal care: haircuts, laundry, and dry cleaning
- Debt repayment: minimum monthly payments on student loans, personal loans, credit cards, and other outstanding debt
Category #2 – Wants
Wants are the expenses that make life more enjoyable but aren’t necessarily essential to your survival.
Your wants are considered discretionary spending, or money you use to cover optional costs, like entertainment, travel, and eating out. You should also include things like subscriptions, memberships, and gifts.
Some common expenses in this category include:
- Restaurants and delivery: this includes costs for bars and delivery apps.
- Recreational activities: sports fees and equipment, gym memberships, nail appointments, and hobby supplies.
- Shopping: clothes, shoes, makeup, and other items you purchase for personal enjoyment.
- Travel: this can include both leisure and business travel.
- Gifts: presents for holidays, birthdays, and other special occasions
- Subscriptions: memberships for things like gyms, online streaming services, and magazines
Category #3 – Your Savings and Investments
Finally, it’s time to calculate your monthly savings—the money you set aside for an emergency or investing in stocks. This category also includes any extra money you’ve added on top of minimum payments.
- Retirement: Contributions to your 401k, 457, or 403b plans
- Investments: Stocks, bonds, ETFs, index funds, etc.
- Emergency savings: Money you’ve set aside just in case.
If you haven’t had the opportunity to start saving yet, that’s okay. By sticking to a budget each month, you’ll have more money to put toward savings goals in the future.
2. List things you’d be willing to cut back on.
You’ll want to list these things before making your budget. That way, you’ll feel more prepared to make changes to your spending habits if necessary to stick to your budgeting plan.
Look over your spending in the “Wants” category. Are there any areas that surprise you? Look at specific subcategories like restaurants or subscriptions. Are there any expenses that you no longer need? Or even expenses that you didn’t realize you were still being charged for (we’ve all been there)?
3. Determine your monthly take-home income.
After all money for taxes, healthcare, social security, retirement savings, and other deductions are taken out of your paycheck, how much money are you left with? This amount is called your take-home pay, or net income.
Take-home pay shouldn’t be confused with gross income—the amount of money your employer pays you before deductions.
If you have multiple income streams, be sure to account for all of them, including payments for parental assistance or disability.
4. Calculate your 50/30/20 budget.
Using the number you recorded for your take-home pay, multiply that number by 0.50. This number is the amount you should save to spend on needs each month.
Next, multiply your take-home income again by 0.30. This number is the target amount to spend on your wants each month.
The final calculation will give you the monthly amount for savings and debt repayment. For this number, take your take-home pay and multiply it by 0.20.
And that’s it! You’ve now got the framework for your 50/30/20 budget.
5. Make a plan for sticking to your budget.
Once you’ve added up all of your expenses and determined your 50/30/20 budget targets, it’s time to start thinking about ways to maintain your budget.
If you find that your budgeting plan requires a bit more saving and a bit less spending, there are plenty of ways to make small efforts that add up over time. To make sure you’ve created a budget that truly works for you, you can evaluate your expenses and consider other ways to cut back, including:
- Shop around for a new car insurance policy
- Look into refinancing your student loans
- Get creative with your living situation
- Downsize your car
- Cook at home more often
- Dip into the “wants” portion of your budget to cover expenses until you can cut costs
Ideally, the 20% you set aside from your monthly income should be dedicated to your savings and debt payments. Sometimes, people find this area tricky, especially if they have debt and haven’t started an emergency savings account. So how do you know whether or not you should dedicate that 20% to savings or debts?
In that case, consider prioritizing this portion of your budget in the following ways:
1. Pay off your most toxic debts.
When it comes to high-interest credit card debt, payday loans, and personal loans, one sneaky beast is eating away at your paycheck: interest. By the time you finish making minimum payments, you likely paid back at least two or three times what you borrowed in the first place. To set yourself on the path to financial freedom, focus on directing every dollar you have to pay off those high-interest cards and loans. Your future self will thank you!
2. Start an emergency fund.
Financial planning experts suggest you build 3-6 months’ worth of savings. Start with a goal of $500 and build up from there. Once you’ve paid off any high-interest debts, an emergency fund is your next priority because it prevents you from going even more into debt.
3. Add more to your retirement fund.
Many employers offer 401(k)s or 457 plans, so try to maximize your long-term returns by investing as much as possible. You could also consider opening a Roth IRA and maximizing your contributions there.
4. Pay off your remaining debt.
Now that you have paid off your most toxic debts, it’s time to tackle lower-interest debts such as your mortgage. If you can afford it, consider adding more each month to your principal payments.
5. Start a reserve account.
A new tire, roof, or sudden medical expense is bound to happen at some point. So get ahead of these life events and start saving for life’s irregular expenses.
Staying accountable to your budget
If you’re like most people, you already know that sticking to a budget can be challenging. But with a few simple tips, you can stay accountable to your budget and keep your finances in check.
One of the most important things you can do to stay accountable to your budget is tracking your spending. This means keeping track of every penny you spend to see where your money is going.
There are a few different ways to track your spending. You can:
- Keep a physical budget journal where you write down everything you spend each day.
- Use a budgeting app (Julep, of course).
- Create a spreadsheet to track spending against the budget you created.
Whatever method you use, tracking your spending is key to staying on top of your finances.
Automate savings and payments
Another great way to stay accountable to your budget is to automate your savings and payments. For example, set up automatic transfers from your checking account to your savings account and opt-in to make automatic monthly payments on utilities.
Doing this will help you ensure you’re always saving money and never miss a payment. Plus, it’ll take some guesswork out of creating your budget.
As you track your spending, you may need to adjust your budget. Don’t worry—this is normal! As your circumstances change, so will your budget.
For example, if you get a raise at work, you may want to increase your monthly savings. Or, if you have an unexpected expense, you may need to adjust your budget for wants that month to accommodate it.
The important thing is that you’re flexible and willing to make changes as needed. Flexibility will help you stay on track and reach your financial goals.
Check-in on your progress
Finally, check your progress regularly to stay motivated and on track.
- Track your progress toward your financial goals
- Celebrate your successes
- Identify areas where you can improve
Don’t be afraid to pat yourself on the back when you’re doing well! Seeing your progress unfold and acknowledging success will help you stay motivated and focused on your goals.
Practice cognitive flexibility
If you’re unfamiliar with the term, cognitive flexibility refers to our ability to remain flexible in our thinking—as opposed to staunch or rigid—as our life circumstances shift.
We get it: life happens. So while it’s important to plan and stick to your budget, it’s also just as important to allow yourself to make room for mental flexibility as circumstances change. Being aware of your mindset about your finances and practicing flexibility in that area will help you learn how to flow with the river, rather than fight against the rocks, when handling your finances. Be like water, friend!
Common beginner budgeting mistakes
Now that you know the basics of budgeting, it’s time to avoid some common mistakes. Here are a few to watch out for:
Not having a plan
One of the biggest mistakes you can make is not having a plan. Without a plan, it’s easy to overspend and get off track.
Remember, your budget is your roadmap to financial success. So, take the time to map out where you want to go and how you will get there.
Not tracking your spending
Another mistake is not tracking your spending. Without monitoring your progress, staying on track and making adjustments as needed is challenging.
There are a few different ways to track your spending. You can keep a physical budget journal, use a budgeting app, or create a spreadsheet. Find what works best for you and make tracking a priority.
Not giving yourself wiggle room
Another common mistake is not creating some wiggle room in your budget. This can lead to frustration and make it difficult to stick to your plan.
Remember, your budget is a guideline, not a strict set of rules. So give yourself some flexibility to stay on track and avoid feeling overwhelmed. If an unexpected expense pops up, reduce your budget for wants first and then dip into saving if absolutely necessary.
Trying to save too much too quickly
Avoid saving too much too quickly, as it can lead to burnout and frustration. Start with a realistic goal, such as saving 10% of your income. Then, increase your savings rate as you get more comfortable with budgeting.
Letting one misstep throw you off course
The process of creating a budget is not an all-or-nothing proposition. So, don’t let one misstep or unexpected expense throw you off course. Everyone makes mistakes and has unexpected expenses from time to time. Practice some self-compassion and don’t be too hard on yourself. You’re human, after all! The important thing is that you get back on track as soon as possible.
Finally, don’t give up! Changing your personal money story and reevaluating your relationship with money can be tough, but it’s worth it. And, Future You will be proud of the efforts Present You is making toward financial freedom. To learn more about changing your relationship with money, check out our guide to total financial wellness.
Frequently asked questions
Oh no! My monthly needs are more than 50%. What do I do?
Get to the root of the problem. What are the top three most expensive bills? Chances are the answer includes your rent, debt payments, or car payment.
Consider making considerable lifestyle changes, like getting a roommate, moving to a less expensive area, or trading in an expensive car for a more affordable one.
I have an unexpected expense. Is my budget ruined forever?
No! budgeting is an imperfect process, so don’t be discouraged if life happens (because it will happen). If this is an expense that affects your ability to live and work, such as a broken furnace in the dead of winter or a fried car engine that prevents you from getting to your job, then do whatever you need to do to fix the situation and get back on track next month.
How often should I reassess my budget?
While you should carefully monitor your spending and account activity daily, you should sit down to recalculate your budget at least once a month or anytime a significant life change occurs. For example, having children, getting a promotion, or moving to a new apartment may require you to rethink your budget before the end of the month.
Can I contribute to a savings account and pay off debt simultaneously?
Yes. Some people like to split the 20% left over after needs and wants between savings and debt payments. This could be a good option for you, especially if you don’t have an emergency fund. However, in most cases, it’s still best to pay off any past due or high-interest debts first to save money on interest charges.
My budget is working, and I have extra money at the end of the month! What should I do with it?
First of all, congratulations! Creating a budget with the 50/30/20 rule can be effective if you stick with it long enough.
Is your extra money resulting from paying off a significant debt like a car note, credit card, or loan? Consider snowballing that extra cash into other monthly payments to pay off your other debts more quickly or stock away towards savings.
Julep is not a financial institution, financial advisor, or credit repair company, and does not provide credit repair services of any kind. The information provided is for general educational and reference purposes only. The information is not intended to provide legal, tax, or financial advice. We do not propose any guarantee that the information provided will repair or improve your financial profile. Consult the services of a competent licensed professional when You need financial assistance.