A personal budget is a financial plan that tracks your income and expenses over a set period of time. It’s an effective way to help manage your individual or family finances and achieve your financial goals.
Budgets can accommodate both long- and short-term goals. For example, your budget could not only encompass a plan to save for retirement, but also help you set aside funds for a vacation or a home improvement project.
Why is a budget important?
The purpose of a budget is to help support your financial goals and make it easier to manage your money. A budget helps you discern between essential and nonessential spending. It also provides greater insight into the ebb and flow of your money. When you know how much you're making and spending, you'll have greater control over your finances.
Budgeting is important for several reasons. It can reduce financial stress and anxiety, help you understand your relationship with money, allow you to pay off debt, and better prepare you for the future.
But where should you start? Here are some strategies for creating an effective budget and sticking to it.
5 tips for creating a budget
1. Visualize your budgeting goals
Are you working toward a tangible goal, such as a new car or a dream vacation? If so, visual reminders of your goal can help you stick to your budget and may inspire new money-saving ideas.
Print and post pictures of your budget goal at home and in the office. For example, you could tape a picture to the corner of your bathroom mirror and on the refrigerator or set the background on your phone or laptop to an image that inspires you.
2. Figure out your budgeting style
Your budgeting style – how you plan to accomplish your savings goals while accommodating your needs and lifestyle – can be as individual as the goals themselves. Here are three common budgeting methods that can help you get started:
50/30/20 budgeting: This budget formula is percentage based. Specifically, 50% of your income is set aside for needs (food, rent, bills), 30% goes toward wants (travel, dining out, entertainment), and the remaining 20% is for savings and debt. This could be an excellent strategy for first-time budgeters or those looking for a straightforward approach to budgeting.
Zero-based budgeting: This method entails allocating every dollar of your income to a specific purpose, like housing, groceries, debt repayment, or a savings. The goal of this approach is to have your income equal to your expenses, leaving you with a net of zero at the end of the month. Zero-based budgeting gives you the control to dictate exactly where and how you spend your money.
Envelope budgeting: With this method, you use physical envelopes — or a digital budgeting app — to divvy up your money into different spending categories. Each category (rent, entertainment, car, etc.) would be housed in a separate envelope. Once the money is gone, you're done spending on that category for the month. This is a good tactic to combat overspending in a certain area and to help visualize exactly where you’re spending you’re money.