Budgeting Basics: Why You Need a Budget
Whether you’re young or old, rich or poor, someone along the way has probably told you that it’s smart to budget your money. You may not have followed that advice, but you know that budgeting can help people keep their finances on track.
In a nutshell, a budget is a plan for spending your money. It helps you see how much money you’re earning and how you’re spending it. People often picture spreadsheets that require frequent updating, but your budget doesn’t have to look like that.
Maybe you’ve never created a budget. Maybe you’ve tried but have fallen off the wagon. Once you know more about why budgets are so important and how you can create one that fits your personality, you’ll be excited to get started.
Why Budgets Are Important
Budgets are boring. Let’s just get that out of the way. It’s not always fun to see how you’re spending your money, and many people resent feeling guilty when they spend on small indulgences.
However, if you’re not paying attention to your finances, it’s too easy to get off track. Before you know it, you’re forgetting to pay bills and getting overdraft fees. With a budget, you have a better idea of what you can afford.
Budgets also help you reach your financial goals. Your budget can help you find places where you could cut spending to put more toward your debt or save for something fun like a vacation.
Three Popular Budgeting Methods
1. The Envelope or Cash-Only Method
In this method, you set a budget for different spending categories—rent, groceries, utilities, entertainment—and put that amount of cash into envelopes. When it’s time to pay, you use the cash in the respective envelope. If the envelope runs out, you stop spending in that category.
2. The Percentage Method
This method, popularized by Dave Ramsey, allocates a percentage of your income to different expenses. A common approach is 50-30-20: 50% for necessities, 30% for wants, and 20% for savings or debt repayment.
3. The No-Budget Method
With this method, you pay your bills first and then spend the remaining money however you choose. The key is treating savings and extra debt payments as necessary “bills.”
Creating Your Budget
No matter which method you choose, start by tracking your expenses. You can save receipts and add them up manually or use budgeting software like Mint.com to categorize spending automatically.
Once you have at least a month’s worth of data, plan your budget using the method that works best for you.
Using Your Budget to Reach Your Goals
Tracking your spending will likely highlight areas where you can improve. Maybe you’re only putting 1% of your income toward debt or making too many grocery store trips.
Adjusting small habits—like taking leftovers for lunch or shopping less frequently—can free up money for savings or debt repayment. Over time, these small changes add up.
Setting up a budget takes time, but the financial security and peace of mind you gain make the effort worthwhile.