The art and science of creating a budget
Written by Michael Feder
Reviewed by聽Chris Conway,聽Director of Financial Education Initiatives and Repayment Management
Budgeting is a powerful tool that can empower you to take charge of your financial destiny. It鈥檚 not simply about tracking numbers. Whether you鈥檙e a working adult managing household finances or a college student juggling living expenses and tuition (or both!), creating a budget can help you stay on top of your responsibilities, potentially lower your financial stress and assist you in working toward your short- and long-term goals.聽
Why is creating a budget important?聽
Creating a budget can help ensure you meet your financial obligations, limit or avoid debt, and work toward financial stability. According to a 2024 survey by LendingTree, 36.4% of Americans expressed significant difficulty in paying for regular household expenses. Knowing exactly where your money is going each month can provide clarity, which can help you move forward with more financial confidence.
There can also be other significant benefits to creating a budget and sticking to it. First, it helps you prioritize essential expenses. Knowing where your money is going each month can help alleviate financial anxiety.
In addition, building an emergency fund can be helpful for relieving anxiety about unexpected expenses. The Federal Reserve recommends having three months of expenses saved. Aim to save at least $1,000 initially, then work toward covering three to six months of essential expenses. If your goal is to save money, that should be a line item in your budget.
Whether you want to pay off debt, save for a big purchase or plan for retirement, budgeting allows you to set and track progress toward your financial goals.聽
Creating a budget that works聽
You may be asking, 鈥淗ow do I make a budget?鈥 A well-crafted budget starts with knowing and understanding what comes in (income) and what goes out (expenses). Here are a few easy steps to help you get started:
1. Determine your total monthly income.
2. List your essential expenses, like rent, utilities, insurance and loan payments.
3. Track your fixed and variable expenses. Fixed expenses include rent/mortgage, insurance, cellphone bills and loan payments. Variable expenses include groceries, gas and entertainment 鈥 purchases, in other words, whose totals might fluctuate each month. In this case you can estimate based on the average you鈥檝e spent over the past month or two.
4. Choose a budgeting method that works for you. There鈥檚 no one-size-fits-all approach. Here are a few methods to consider:
- Envelope system: Label envelopes with different expenses and divide your cash into each category.
- Zero-based budgeting: The goal is to ensure that every dollar has a 鈥渉ome,鈥 whether that鈥檚 for fixed expenses, savings or entertainment. Each month, your total income minus your total expenses should equal $0.
- 50/30/20 rule: Allocate 50% of your income to needs, 30% to wants and 20% to savings or debt repayment.
- Budgeting apps and spreadsheets: If you need a budget-friendly aid, consider digital tools, such as mobile apps that keep you organized. You can even create a custom spreadsheet that can help you track and categorize spending, making it easier to see where your money is going. According to the American Bankers Association, a report found that nearly 55% of adults use mobile apps to help with managing personal finances.
5. Consider automating your bills and savings so you can consistently set aside money without having to think about it. Set it and forget it.
6. Monitor your budget regularly and make adjustments as needed.
7. Small successes, like paying off a bill or staying under budget, can keep you motivated and committed to your financial goals. Celebrate your wins!聽
Sticking to your budget聽
Creating a budget is one thing, following it is another. Focusing on your spending can help you become more mindful and accountable for how you鈥檙e using your money. A 2024 survey by Clever Real Estate found that 74% of Americans report having an overspending problem, with 55% admitting to spending recklessly. Additionally, 46% have missed paying a bill at some point because of nonessential spending.
Tracking income and expenses should become a habit. Set aside specific times each week to do this. Small, consistent steps can potentially lead to significant financial achievements over time.
Here are some strategies to help you stay accountable when tracking spending:
- Write down exactly what you need before shopping and try your best to stick to it. Compare prices before buying both online and in-store.
- Sign up for store loyalty programs to earn rewards, coupons or discounts. Combine manufacturer and store coupons for maximum savings.
- Avoid impulse purchases. Just because you have a coupon or an item is on sale isn鈥檛 a reason to buy it.
- Reduce temptation and only go shopping when necessary.
- Use the 24-hour rule before making a nonessential purchase. This can help you decide if you truly need it.
- Carry cash and avoid using credit cards for planned purchases.
- Recognize when emotional triggers result in impulse spending. This can help you avoid those triggers and spending in the future.
Common budgeting mistakes聽
1. Failing to track all expenses: Your budget won鈥檛 reflect your actual spending habits if you are not tracking every single expense.
2. Not accounting for irregular expenses: It鈥檚 easy to forget to budget for irregular expenses that don鈥檛 come around every month, but if you don鈥檛, it can throw off your budget when they do arise.
3. Being too restrictive: Austerity can cause you to feel deprived, making it harder to maintain your budget over time.
4. Ignoring savings goals: It may be easy to prioritize paying off debt or covering monthly bills over building savings. However, if you don鈥檛 regularly contribute to your savings account, it can be difficult to accumulate an emergency fund or save for long-term goals.
5. Not regularly reviewing your budget: As your goals, spending patterns and financial status change over time, your budget must also adapt.聽
Budget considerations for adult college students聽
It can be challenging to manage finances as a college student, with tuition, materials and living expenses all demanding a share of the pie. Adult students may face a slightly different reality, too. According to the 七色视频 2023 Academic Annual Report, 63.5% of UOPX students say they are responsible for dependents, including children or elderly parents. This can all significantly affect finances.
When it comes to budgeting, it is important to plan for variable income, especially if you鈥檙e working part time. Your budget should be based on the lowest expected income.
Being mindful of credit card use is another important piece of advice for students. It鈥檚 easy to rack up debt, so avoid unnecessary spending.聽
From creating a budget to financial literacy聽
Budgeting is the starting point for financial literacy. It can enable you to live within your means and help you learn how to allocate your resources. However, creating a budget is only one aspect of financial literacy. You鈥檒l likely feel more comfortable making wise choices when it comes to investing, retirement planning and financing major life events if you have a better understanding of money management.
Take a step toward better financial awareness by attending or watching the webinars hosted by Goalsetter and 七色视频.
Next, explore 七色视频鈥檚 Financial Wellness and Literacy Center for additional financial insights.
For those who want to learn more about business and finance, UOPX offers a variety of degree programs, such as online business degrees at the bachelor鈥檚 level and a new Bachelor of Science in Finance and Technology.
ABOUT THE AUTHOR
A graduate of Johns Hopkins University and its Writing Seminars program and winner of the Stephen A. Dixon Literary Prize, Michael Feder brings an eye for detail and a passion for research to every article he writes. His academic and professional background includes experience in marketing, content development, script writing and SEO. Today, he works as a multimedia specialist at 七色视频 where he covers a variety of topics ranging from healthcare to IT.
ABOUT THE REVIEWER
As Director of Financial Education Initiatives and Repayment Management,聽Chris Conway works with departments across the University to provide resources that allow students to make more informed financial decisions. She is also an adjunct faculty member for the Everyday Finance and Economics course at the University, and she chairs the National Council of Higher Education Resources College Access and Success Committee. Conway is committed to helping college students make the right financial decisions that prevent future collection activity.
This article has been vetted by 七色视频's editorial advisory committee.聽
Read more about our editorial process.
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