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Budgeting

What Is a Budget?

You’ve probably heard about the importance of a budget over the years. Maybe your personal finance teacher went over it in high school or your dad was always at his desk keeping the budget every Saturday morning. But what is a budget . . . really?

Today, we’re taking a deep dive into the world of budgeting to answer every budgeting question you could possibly have. Let’s jump in.

What Is a Budget?

A budget is a written plan for your money. Simple enough, right?

Well, it’s often easier said than done. But when you commit to doing a written budget every single month on purpose, it actually gets easier and easier.

Growing up, you probably thought a budget was just your parents’ way of reining in your spending when you asked to go to the movies—multiple times a week. After all, “money doesn’t grow on trees, you know.”  

Here’s the truth: A budget actually gives you permission to spend. Shocking, isn’t it? So, instead of just seeing a budget as a list of what you can and can’t spend, you need to look at it as your money’s game plan for the month—because spending every dollar you make (and wondering where it all went) gets pretty old. A budget gives you the opportunity to make a plan and spend your money on the things you really care about.

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Pretty cool, huh?  

What Types of Budgets Are There?

Ask anyone on the street what types of budgets exist, and you might hear something new every time. For instance, some wise guy might tell you they use the “pillow” budget, which just means they hope to have a pillow of cash left over each month. (News flash: That’s not a budget.)

Remember, a budget is a written plan for your money. And sure, your version of written might be an app, spreadsheet in Excel, or good ol’ pen and paper—it doesn’t matter. What matters most is that it’s a real budget and that you’re actually doing one every month before the month begins!

Here are four types of budgets people use to plan their spending . . . don’t worry, we’ll share our favorite too.

1. 50/30/20 Rule

The 50/30/20 rule is based off of percentages (which is nice), but doesn’t leave a lot of room to tackle your debt (which is not so nice). With this method, 50% of your income goes toward your needs, 30% goes toward wants, and 20% goes toward savings. Yep—you read that right . . . 20% of your income goes toward savings. This kind of budget assumes you care only about saving money—not paying off debt. And we’re not ok with that.

2. 60% Solution

With this method, you’re combining all your wants and needs into 60% of your budget and saving the other 40%. Sounds better than the 50/30/20 rule, right? Not so fast. That 40% gets divided up into specific savings categories: 10% goes toward retirement, 10% to long-term savings, 10% to short-term savings, and the last 10% to “fun.”

While this method might appeal to first-time budgeters, it’s not great for the long term. Not only is the line between needs and wants a little too blurry, you’re also dividing your savings so much that you won’t make any real progress toward your goals.

3. Reverse Budgeting

Most budgeting methods have you spending first and saving last. But with the reverse budget, you’re doing the exact opposite. With reverse budgeting, you’ll set aside money for saving and investing before you budget for things like housing, gas, food, insurance, debt and the nonessentials. We love the emphasis on savings first here, since we believe you should have a starter emergency fund of $1,000. But we also believe debt is the next thing you need to tackle (especially before you get into investing).

4. Zero-Based Budgeting

This is our personal favorite. A zero-based budget is when all your income minus all your expenses equals zero. If you’re a little squirmy reading that, we get it. But a zero-based budget doesn’t mean you have zero in your bank account. It just means that you’re giving every single dollar a name and a job to do.

It means you get to decide how much money you put toward debt and savings every single month—so you don’t have to worry about it after you’ve already spent most of your paycheck. A zero-based budget puts you in control of your money . . . not the other way around.

The Best Way to Budget

Zero-based budgeting is the proven method for budgeting. It’s your financial game plan for the coming month, every month. And when you stick to it, you’ll hit your money goals in no time.

Here’s how it works: All the money going out should be the same amount as the money coming in. So, if you make $5,000 a month, you’re giving all $5,000 a job: paying bills, saving money, paying off debt, and living life! When you add in every source of income and then subtract every single expense, your budget should end up at zero.

Here’s an important callout: While your budget should hit zero, your bank account should never hit zero. Keep a little buffer of about $100–300 in your checking account, depending on what works for you.

Your budget should hit zero every single month because you’re budgeting all those dollar bills. Every. Single. One. Anything that’s “extra” doesn’t stay extra. Put it to good use working for you—every last dollar of it. That’s how you get your money actions in line with your money goals.  

And guess what? It’s way easier to budget when you’ve got a budgeting tool. Not only that, but it’s way, way easier when that tool is mobile and built on the zero-based budgeting method. (That’s EveryDollar.)

Why Budgeting Is So Important

These last few years have shown the world the harsh reality of what happens when the unexpected hits: job losses, paycheck-to-paycheck living. People are seeing the real need to have cash stowed away in an emergency fund.

But research from The State of Personal Finance study by Ramsey Solutions shows that six out of 10 people in America still don’t do a monthly budget. And of the 40% who are budgeting, just one-third of them started in the past year.1

You work too dang hard to just wonder where your money goes every single month. If that’s you, you’re not alone—78% of Americans are living paycheck to paycheck.2 But you don’t have to live that way! When you get on a budget, you won’t have thoughts like, Why can’t I pay my freaking bills every month? I make too much to be this broke.

And if you’ve tried budgeting before and gave up, try again. It can be a little rocky starting off, but stick with it. (It takes a few months to get the kinks worked out.) Once you get the hang of it, you’ll see why doing a budget is so worth it.

And guess what? We’ve got a free budgeting tool that will help you get on the right track with your money and financial goals. According to research from Ramsey Solutions, EveryDollar helps the average household find $332 in the first month of their budget. Score!

Top Excuses for Why People Don’t Budget

All right, so you’ve probably heard (or made) plenty of excuses for why you can’t or shouldn’t budget. We have too. Let’s see if there’s any truth behind these six budgeting excuses.

Excuse #1: Budgeters don’t have any fun.

Listen, budgeting doesn’t mean you can never spend money. It means you make a plan for how you spend money so you can do it like a responsible adult. So, yes, you have to budget for the fun stuff. And you should always budget for the things you need before all the things you want. But it’s not business or pleasure—it’s both!

Excuse #2: Budgeters have to be good at math.

You don’t have to be a mathlete to do a monthly budget. Everyone needs to budget—whether you’re left-brained or right-brained. If you don’t love math, there’s an app for that (and we know a good one).

Excuse #3: Only people struggling with their money need a budget.

Not so fast. Everyone needs a budget. A budget helps you take control of your money, get on track with your money goals, and knock debt out of your life forever.

So, even if you’re doing pretty good with managing your money, a budget will show you where you might be wasting your hard-earned dollars. The moral of the story is . . . no matter if you’re on the struggle bus or feeling pretty good about your finances—a budget is still for you. And get this: We found that most new budgeters felt like they got a raise when they started budgeting for the first time!

Excuse #4: Budgeting takes too much time.

Anything worth investing in takes time (including your finances). When it comes to your money, you can’t afford not to spend time budgeting—your financial success depends on it. Plus, think about it this way: Would you rather spend time worrying about all your money problems or just take the time to make a plan and actually solve them? Yeah . . . we thought so.

Excuse #5: Budgets are only for people who don’t have debt.

We’ve said it before and we’ll say it again . . . everyone needs a budget, no matter if they’re up to their eyeballs in debt or swimming in millions of dollars in cash. A budget is how you keep track of your money and make sure you’re in the driver’s seat of where it’s going. It helps you with all your financial goals—especially paying off debt. Remember: A budget gives you freedom to spend (while also making sure you’re not throwing your money away every month).

Excuse #6: A budget is too rigid.

Doing a budget doesn’t mean you can’t spend. It actually gives you permission to spend your money on the things that matter the most. But what’s important to you this month might be lower on your priority list next month. The best thing about a budget is that you get to call the shots.

How to Start Budgeting

Now that we’ve gotten the excuses out of the way, it’s time to start budgeting. But how? (We didn’t bring you this far to leave you in the dark!) Let’s get to it.

Step 1: Write down your total income.

This means your total take-home pay after tax. And if you’re married, write your spouse’s income down too. Don’t forget to include your other streams of income (like a second job, social security checks, or that cash gift from Grandma).

Step 2: List all of your expenses.

Give

The very first thing you need to budget for is giving. That’s right. Even if you’re in debt or have some intense goals for your money, giving comes first. If you’re just starting out, give a little until you can start giving a lot. It changes who you are when you live with an open hand.

Save

And now that you’ve budgeted for generosity, it’s time to move on to saving. If you’re still in debt, you’re only going to save until you hit $1,000 (for your starter emergency fund). Then, you’re going to cut back on saving until you’ve paid off all of your debt.

Spend

Now, it’s time to spend. The first thing you want to do is take care of your family. You’ll start with your four walls: food, utilities, shelter and transportation.

After your necessities are budgeted for, add in everything else—things like insurance, debts, childcare, personal spending or entertainment. Make sure you write down everything. Remember, every single dollar gets put to use here.

Step 3: Subtract your expenses from your total income.

This is the fun part. If your heart’s beating faster as you watch that income dwindle to zero for the first time, that’s okay. In fact, it’s normal. Remember, you want to spend every single dollar you make. If you still have money to spend, go back to Step 2 and make sure you give that money a job to do. And if you’ve spent too much, it’s time to revisit those categories. Where can you make some cuts? Where can you do without? Keep working at your budget until you see that beautiful goose egg (zero).

Step 4: Start tracking.

Now that you’ve done the hard part, it’s time for the fun part—tracking. As you spend your money throughout the month (whether that’s on the normal stuff or the fun stuff), keep track! Making a budget without tracking is like making a goal to work out but never actually going to the gym. When you track, you’re putting your plan into action. It’s the only way to know if your actual spending lines up with the budget you’re creating each and every single month.

But tracking isn’t a one-time thing. You’ve got to track every single expense . . . all month long. And if it turns out you underestimated one category and overestimated another, you can adjust your budget categories as you need to (yes, you can do that!). The point isn’t to get everything 100% right at the beginning of the month. The point is to be intentional about your spending, even if that means tweaking your budget occasionally.

Plus, now that you’ve tracked every expense from last month, you have a better idea of what your spending will look like next month. The more you keep budgeting (and tracking), the more you’ll notice patterns in your spending—and be able to create a budget and stick to it.

Step 5: Create next month’s budget (before the month begins).

We’ve said it before, and we’ll say it again: A budget only works if you stick to it. That means doing a budget every month before the next month begins.

And since you had a budget this month, all you have to do is copy and paste it and then tweak it for the next month. Maybe your mom’s birthday is coming up and you want to get her a gift (add that in!). Or maybe you need an oil change. Planning your budget in advance will help you keep any surprises away and keep more of your dollars where they need to be: in your bank account.

Want more where this came from? Check out our Complete Guide to Budgeting for simple tips and tricks for creating your own zero-based budget. And if you’re ready to get started right now, download EveryDollar (it’s free!). Not only is it the world’s best budgeting app, it’s also easy to use. Once you create your budget, tracking your spending is simple. Start budgeting with confidence and take control of your money today. 

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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