Despite the importance of a budget, more than half of Americans don't have one, and 22% say they don't have a clear picture of what they spend on housing, food and entertainment. What's most surprising to us is that 78% of Americans say they do know what they are spending their money on, yet half don't have budgets.
Without a budget, your financial picture is at best muddy. At worst, you might find yourself overspending, racking up credit card debt and feeling confused and anxious about your situation. But a good budget gives you the confidence and a blueprint to live the life you want.
Budgeting in a Nutshell
A budget is a monthly financial plan that divides your income into categories. It uses your monthly income as a cap on your spending and then determines how you allocate your money to savings goals and expenses within that limit. It is the most crucial element of your personal finances, the key to living within your means and building your wealth. In short, a budget is part of any financially with-it adult's life plan. And it can and will change as you mature and see your wants, needs and goals shift.
Why Budgets Are Important
A budget will:
- Give you a clear picture of your financial situation so you can live within your means
- Show you how much you can afford to spend — right down to the dollar — on everything from food ($200) to rent ($900) to a cocktail dress ($103)
- Keep you motivated and accountable on your way to reaching your financial goals
We also love budgets because they give you a convenient framework in which to talk to yourself and others about what you can and can't afford. "It's way too expensive," in response to your mom urging you to fly home for a second visit in this summer isn't nearly as polite and effective as, "Another plane ticket just isn't in my budget." (Try it — you'll see the difference.)
How a Budget Prioritizes Your Money
Another benefit of a budget is that it helps you prioritize your spending. LearnVest recommends your budget follow the 50/20/30 rule. After your income comes in, this rule recommends that your money go out in this order.
50% of Your Budget Should Go to Essential Expenses
These are the expenses you always have to pay as a minimum to keep your life going, such as your housing, transportation, groceries and utilities.
Next, 20% Should Go to Financial Priorities
These are expenses that help you accomplish important financial tasks, such as paying off loans, building savings, saving for retirement and more; they generally include savings, debt repayment and financial contributions.
Lastly, 30% Should Go to Lifestyle Choices
This is what's leftover, which is what you get to live on and enjoy now, on expenses such as dining out, shopping and other fun spending. As you can see from these general guidelines, a budget is very personal. Your best friend the foodie might give herself a restaurant budget of $200 a month while setting a low limit of $30 on entertainment. Meanwhile, because you're a music buff, you might set aside $150 for concerts every month and scrimp everywhere else. Similarly, the budget of someone paying back student loans and working in public service will be very different from someone who is debt-free and working in finance. But both can enjoy life and stay within budget, as long as they are realistic and know what they want out of their money.
How to Get a Budget to Work for You
Always, always have a realistic budget.
Stick to it. We build monthly budgets, but that doesn't mean you should only check in once a month. Depending on how tight your budget is, you should check in to see how you are doing every week, every day or maybe even before every purchase. Remember, there is a limited amount of money you can spend every month after your Essentials and Priorities are taken care of, so you want to be mindful of how much you've already spent as the month goes by. If you're finding it hard to stick to your budget, then you should question whether it's truly realistic. You may need to earn more or cut costs to make it work.
Revisit your budget. Your budget will change as your wants and needs change, and also if you get a raise! At the end of each month, look at how you did and get realistic about your budget. If you are consistently going over your grocery budget, maybe you should cut back in other areas in order to increase it, or look for new ways to cut it. This is not to say, however, that you should redo your entire budget on a daily basis. You'll confuse yourself and never learn from month to month how well you're sticking to your goals. And when you get a raise, don't just start spending more on dinner or get a nicer apartment. Also increase your savings, debt repayment and other priorities in order to keep your budget balanced and in line with the 50/20/30 rule.