Personal Finance 101: Budgeting Basics

What Is a Budget?
•    A budget is a financial tool that helps you assess your income and day-to-day spending, so you can set realistic financial goals.
•    There are many different budgeting methods; choose the one that works best for you. 
•    Regularly reviewing and adjusting your budget helps keep spending aligned with your financial goals.

Chances are you’ve heard about the importance of budgeting. It’s one of the most frequently repeated pieces of financial advice, and for good reason: Using a budget to track your cashflow is the foundation for reaching long-term goals. 

Why Everyone Needs a Budget
A budget allows you to evaluate how you’re spending your money and helps ensure your spending aligns with your priorities. Key components of a budget include sources of income, as well as fixed and variable expenses. 

Income includes:
•    Take-home pay after taxes
•    Bonuses
•    Tips
•    Tax refunds
•    Investments
•    Social Security

Fixed expenses stay the same every month and include:
•    Housing costs like rent or mortgage payments
•    Vehicle or loan payments
•    Insurance premiums
•    Property taxes

Variable expenses can fluctuate and include payments such as:
•    Utilities
•    Groceries
•    Travel
•    Gifts
•    Entertainment
•    Out-of-pocket healthcare costs
•    Commuting
•    Clothing
•    Miscellaneous

The First Step in Better Budgeting 
Your first step is to document how money is coming in and going out every month. Start by tracking your income and expenses for 30 days to get the full picture. Consult your bank statements, receipts, and credit card statements for records of all expenditures. 

Now that you can see where your money’s going, you can build a realistic spending plan going forward. 

Types of Budgets
Your success in sticking to a budget largely depends on finding an approach that fits your style and situation. Here are three common budgeting methods to consider:

Traditional budgeting
This approach organizes spending into categories based on fixed and variable expenses and budgets a certain amount of money for each spending category. For example, dedicate a certain amount of money each month for groceries, gas, and entertainment. Track your day-to-day expenditures in each category and once you reach your limit, either stop spending in that category or “transfer” funds from another category. 

Reverse budgeting
This method is also known as “paying yourself first” and prioritizes savings or other financial goals over spending. With reverse budgeting you allocate money at the top of your priority list first, then work your way down. 

For example, say you want to build a $5,000 emergency fund and you plan to put $250 each month toward that goal. You would allocate money to that goal first, fund fixed expenses like rent or car payments second, and cover variable expenses like travel or entertainment third. What if you run out of money before you get through all three categories? Make adjustments to money allocated for variable spending first— before tapping savings. 

Zero-based budgeting
With this system, your income minus expenses should equal zero. Create your budget by giving every dollar coming in during the month a function—putting your entire income toward expenses, savings, debt or donations, with none “left over.” 

How to Align a Budget with Your Goals
Setting a budget forces you to evaluate whether spending meets or exceeds your monthly income and determines where you need to adjust. Even if you have money left over each month, it’s important to determine whether your spending is putting you on the path toward your goals. Set targets for what you want to achieve, such as paying down debt, contributing to a retirement account, or saving for a vacation. You may find that taking money from one pot (like eating out) and putting it toward another (like an emergency fund) better reflects your priorities. 

If you’re spending more than you earn, you can gauge ways to cut back, perhaps by curbing takeout or delivery meals, paring subscription services, or planning less expensive getaways. But it’s also important to attack this problem from the other side of the equation. Make sure to look for ways to increase your income.  

How to Avoid Common Budget Pitfalls
If you’ve adjusted spending or brought in additional income and things still aren’t adding up, ask these questions to check where you might be able to make a change:

•    Are you putting too much on credit? Look over the budget categories where you overspent, paying close attention to your credit card statements.
•    Are you behind the times? Sometimes, a budget gets out of sync not because of unnecessary spending, but because of rising prices for necessary expenses. 
•    Are you allowing leeway? It’s often better to budget a bit too much in a few categories (certainly including miscellaneous or contingencies) than to end each month overextended in some areas.

How to Keep Your Budget on Track
Creating a budget helps you plan for the future but sticking to that budget over time will make those plans materialize. Here are some ways to stay disciplined: 

Budgeting apps like Mint or You Need a Budget allow you to track your spending right from your phone so you can easily keep tabs on your progress. These apps allow you to designate different spending categories and link directly to your bank account.

Spreadsheets, worksheets, or handwritten ledgers also get the job done, especially if you find it helpful to manually note each inflow and outflow. 

A series of envelopes to stash cash for expenses really makes the process simple—and spending tangible. Put a certain amount of money in one envelope for groceries, one for entertainment, one for savings and so on. When you’re out of cash in a particular envelope, you stop spending in that category until you put money in again (or add money from a different envelope).

No matter which method you choose, regularly revisit your budget to keep it realistic. A budget should be a living document—something you modify as life circumstances change and priorities shift. Ultimately, your budget is a financial foundation: It gives you control over your money, helps you be more intentional with spending, and allows you to focus on important goals.