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A Beginner's Guide to Budgeting

Last updated Nov 1, 2023

Simply put, a “budget” is a plan that guides how you spend and save your money.

Everyone needs a budget, whether they’re just starting out or already making a six-figure salary. People who are vigilant about budgeting feel more in control of their money and more prepared for the unexpected, leading to greater overall mental health compared to those who don’t budget.1 Budgeting is also a crucial habit if you want to build and/or maintain a good credit score.

Building a budget involves two things: recognizing how much money you have coming in every month and assigning a purpose to each dollar. While this might sound intimidating, it’s actually pretty simple! We’ve compiled these tips to guide you through the process of creating a budget you can stick to long-term.

Get A Clear Picture of Your Income

The first step to any budget is understanding how much money you regularly bring in. Add up your monthly after-tax income, including what you make at your main job, any alimony, Social Security benefits, or child support payments you receive, and revenue from any side jobs and/or investments.

Consider Your Monthly Expenses

Once you know how much money you have to work with, look at your regular monthly expenses. A “monthly expense” is anything you predictably spend money on each month. Examples of common monthly expenses include:

  • Housing, such as rent or a mortgage payment
  • Transportation, including car payments, gas, car insurance, and/or public transportation fare
  • Food, including groceries and an estimate of what you spend on restaurants and takeout
  • Utilities, like electricity, gas, water, cable, and Internet
  • Pet costs, such as food, vet bills, and pet insurance2

It may help to look over your most recent bank or credit card statements to get a picture of not only your expenses themselves, but how much you regularly spend on them. Add up your spending from the last month, then subtract the total from the income you calculated in the step above. The remainder indicates how much you should try to save each month. 

Pick a Budgeting Method 

Once you know how much you regularly spend monthly, look for areas you can cut back and ways you can reign in your spending. This is where your choice of budgeting method comes in! The right budgeting method gives you an easy-to-track way of reducing your spending while maximizing your savings and/or enabling you to pay off debt faster.

Common budgeting methods include: 

  • The 50/20/30 rule. This popular method encourages you to balance saving, debt repayment, and “fun” spending all at the same time. You’ll allocate 50% of your after-tax income to things you need (e.g. rent, utilities, a modest amount for food, fuel, and clothing) and 20% to saving for emergencies and/or repaying debts. The remaining 30% is yours to do with as you wish.3 This is a great option if you’re new to budgeting and need a method that makes room for fun.
  • The “pay yourself first” method. Also known as the “reverse budget,” this method involves building your spending plan around an aggressive savings goal. When you use this method, you’ll set money aside in your savings account and then make a plan for how to spend what remains.4 We recommend this method if you’re more interested in saving money than anything else. 
  • The envelope system. This is great for those who prefer using physical cash. You’ll need a set of envelopes and the amount you have to budget in cash. Label each envelope with a different spending category, such as “groceries,” “entertainment,” or “gas,” then put cash in each envelope according to how much you want to spend in that category.5 For the more tech-oriented among us who prefer not to work with cash, consider a personal finance app with a digital “envelope system.”  

Any method you choose will involve carefully monitoring your spending and will likely require you to trim it where you can. Make that easier with our series of cost-cutting tips

Should You Save or Pay Off Debt?

If you have low savings and/or a lot of debt, you may be torn between what to address first. Should you focus on building a robust savings account and make minimum payments on your debts, or throw everything you can at your debts and save less? The answer lies somewhere in the middle, and largely depends on how much money you already have saved.

If you have less than $1,000 in your savings account, focus on saving that amount first. Many experts agree that $1,000 is a good “starter fund,” and that once you’ve reached that milestone (or if you already have), focus on getting out of debt ASAP.6 Trimming down your debt reduces the amount you’ll pay in interest over time. That’s money you can put right into your savings account!

Avoid Budgeting Burnout

Budgeting can be exciting at first, and this initial excitement can be very motivating. But it may falter when the realities of life (e.g. expensive car repairs, a costly medical bill, a sudden loss of or decrease in income) disrupt your progress. And even if things go smoothly, you may eventually feel “budgeting burnout.” 

Budgeting burnout happens for many reasons, including being overly restrictive with your spending, setting unrealistic expectations, or trying to budget in isolation.7 Check in with yourself regularly and assess how you’re feeling. If you find that your motivation is lagging, take care of yourself and do what you can to get motivated again. This may include buying yourself a small treat or reward, revisiting your expectations and seeing if you need to dial them back, and/or finding someone (a friend, your partner, or someone else you trust) to be your “budgeting buddy.”

Keep An Eye On Your Credit

A budget makes it easier to live within your means and avoid turning to credit cards for short-term financial help. As you continue to live by your budget, you’ll likely see your credit score go up! You can stay on that positive trajectory through behavioral changes like:

  • Making extra payments on your debts where possible
  • Taking your credit cards out of your wallet 
  • Removing your credit card info from your internet browsers to make it more difficult to use your card

A little financial know-how can set you up for great success. Upgrade’s Credit Health monitoring tool takes everything you need to stay on top of your credit score and puts it directly in your pocket. You’ll get weekly updates on your credit status, a breakdown of your credit score, personalized recommendations for boosting your score, and more. You can also check out our other helpful Credit Health Insights for extra guidance on saving money, building good credit, and navigating your finances.

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