What Is a Budget?

What Is a Budget?

A budget is a plan for how you’ll direct your money toward your necessary expenses, the things you want and your long-term financial goals.

While some people associate budgets with harsh restrictions and having to go without, the point of a budget is to better afford the things that matter most. That includes the basics—food, shelter and the like—but it also includes the things that make you happy, such as hobbies or going out with friends.

Put differently, a budget is a blueprint for your full financial life. It’s a tool for combating overspending and bringing new financial opportunities into reach.

4 Types of Budgets

There are many ways you can structure your budget, and different budgeting methods can be well-suited to different saving and spending styles. Here’s a breakdown of four popular types of budgets.

1. 50/30/20 Budget

The 50/30/20 budget is a type of spending plan where you allocate your money into three main categories:

• Basic needs: 50%. This covers just the essentials, such as housing, basic groceries, child care and utility bills.
• Wants: 30%. These nonessentials make up your discretionary spending, such as going out to eat, spending on entertainment or shopping, that goes beyond your basic needs.
• Savings and debt payoff: 20%. This chunk of money goes toward meeting your savings goals or paying off debt.

The appeal of a 50/30/20 budget is that you can easily rework the percentages to match your personal financial situation. Say, for example, your housing payment represents a large portion of your income. In that case, you could shift your percentages to put an extra 10% toward essentials.

On the other hand, maybe you could put less toward needs and wants then funnel the difference into savings and debt payoff to meet your goals faster.

2. Zero-Based Budgeting

With a zero-based budget, you’ll “zero out” your income each month by assigning every dollar you make to a spending category. If you spend all of the money you’ve assigned to a given category, you’ll need to cut yourself off or else pull from another pool of funds to avoid going into the red.

Giving every dollar a job means no income goes unaccounted for. Of course, the goal isn’t to spend everything you have. The trick is to build savings categories directly into your budget and treat the money you put toward them as already spent.

Some people swear by zero-based budgeting as a powerful way to reel in overspending with a super clear view of where your money is really going. The downside is that it’s a pretty rigid way to manage your money, which could lead to burning out.

If you decide to try zero-based budgeting, pick a budget app that’s designed for it, such as You Need a Budget (YNAB).

3. Envelope Budgeting

Envelope budgeting is a lot like zero-based budgeting. The difference is that you budget using physical cash, and your categories are represented by physical envelopes that you fill with bills—hence the popular modern name for the method, cash stuffing.

In practice, this could look like having an envelope for groceries, gas, dining out and any other number of spending categories that make sense for you. Once an envelope is empty, you can’t spend any more in that category until your next pay period (unless you borrow from another envelope).

Some people find that handling physical cash makes it easier to stay mindful of their spending. Of course, budgeting entirely in cash can get pretty tricky. If you do decide to go this route, it could be necessary to keep handling things like your housing payment and savings using cashless methods. You can also use a budgeting app like Goodbudget that allows you to track your envelope spending virtually.

4. Pay-Yourself-First Budget

Also called a reverse budget, a pay-yourself-first budget is a way of building your spending plan around your savings and debt repayment goals. This method works by transferring money into savings or putting it toward your debt as your first priority when you get paid.

After that, you can think of the remainder of your money as a one big pool of funds. You’ll need to be sure you’re to cover all your necessary expenses before you spend freely on nonessentials.

This method can work well if you have a firm handle on your financial obligations and feel most comfortable taking a flexible approach to managing your money.

On the other hand, this method could easily lead to overdrawing your account or going into debt if you aren’t careful with your spending. Be sure you’re implementing some guardrails, such as setting up spending alerts or ensuring all your bills are set up to autopay when you get paid.

How to Make a Budget

Here are steps you can take to make a budget.

1. Calculate Your Expenses

To get a sense of your baseline spending, take a look back at your spending over the past few months. You could conduct a spending review by printing out your bank or credit card statements, highlighting spending in various categories (like food, transportation and retail) and then adding up those amounts. You could also use spreadsheet software. Or, check if your bank or credit card app includes a feature that automatically sorts your spending into categories.

2. Calculate Your Income

Add up all your sources of income, including paychecks and any money from tips, side gigs, unemployment compensation, Social Security or other sources. If your income is variable, you’ll need to look back over a period of many months to come up with an average and learn about how to budget with an irregular income.

3. Set New Financial Goals

Come up with realistic ideas for how you want to improve your financial life. The size and scope of your goals should match your financial situation now, while also acting as a springboard for where you want to end up.

For example, if you’re currently living paycheck-to-paycheck, a great financial goal could be to break the cycle by cutting your spending and contributing a set amount each week into an emergency fund.

Another goal you could set is to get out of high-interest debt. Learn about how to create a debt repayment budget and strategies you can use alongside your budget to pay off debt faster.

Beyond creating an emergency fund, consider building additional savings goals into your budget. For example, you could set your sights on saving up enough for a down payment on a house. Or, you could create sinking funds to reach mini savings goals, such as covering routine car maintenance, buying new appliances or paying for your next vacation.

4. Pick a Budget Method

Decide how you want to structure your budget using the different budgeting methods described above. If you’re just getting started, using a flexible budget like the 50/30/20 plan can help you get the ball rolling.

5. Track Your Spending

The easiest way to assign money to different categories and track your spending is to download a budgeting app that automatically syncs to your bank account. That way, you can import and categorize transactions and chart your progress over time.

You can also track your spending by reviewing your transactions and sorting them on paper or in a spreadsheet.

6. Adjust as Needed

Especially when you’re just starting out, you may miss the marks you set for yourself. Don’t sweat it. Instead, look for ways to adjust your spending to meet your budget. You may find that planning your meals in advance helps you cut back on food spending, for example.

On the other hand, you may find that you need to adjust your budget to be more realistic if you keep going over.

How to Stick to a Budget

Sticking with your budget comes down to setting a plan that you feel comfortable sticking to and then holding yourself accountable. Here are some tips for staying on track:

• Think back to why you created a budget in the first place. Take time to reflect back on goals you set out to reach when you first decided to create a budget. Do you want to get out of debt? Buy a home? Plan your dream wedding? Envisioning yourself reaching these goals can help you regain motivation.
• Don’t ignore burnout. If you’re consistently struggling to stick to your budget, it could be that you’ve created a spending plan that’s unrealistically strict. Look over your goals to make sure they’re realistic.
• Celebrate small wins. At the end of the day, making meaningful changes can be hard. Set small milestones (such as sticking to your dining-out budget for the week) and then celebrate your progress using no-splurge treats.

Can Budgeting Help Your Credit?

Budgeting won’t directly impact your credit, positively or negatively. That’s because information on your income and spending habits isn’t reported to the three credit bureaus (Experian, TransUnion and Equifax), and so it doesn’t appear on your credit report or have an impact on your credit scores.

That said, budgeting could indirectly help you improve your credit in a couple key ways. Budgeting for monthly payments can help ensure you always pay on time. Your payment history has the single biggest impact on your credit score. Budgeting can help you reduce your debt or avoid maxing out your credit cards. Both of these can lower your credit utilization ratio, which has a positive impact on your score.

To track how your budgeting and credit management strategies affect your score over time, sign up for free credit monitoring from Experian.