Conquer Budgeting: 3 Tips on How to Budget

February 23, 2023

"I really look forward to budgeting," said no one ever.

You wouldn't start a trip without a plan.  Without a budget, you can't determine if your income will permit you to spend your money the way you want.

Reluctance to budget

Although having a budget is critical to sound financial planning, one survey found most Americans (over 55%) don't track their spending with a budget.  Unsurprisingly, these "non-budgeters" don't know how much they spend monthly.

Why do so few people budget?

The same survey found they didn't think it was necessary.  Other excuses include not having the time or energy or being disorganized.

Without a budget, you are "flying blind" with your finances.  It's not a responsible or intelligent way to manage your money.

Benefits of budgeting

Without a clear picture of your income and expenses, it's easy to overspend, fail to put away money for retirement, or save for large purchases like a house or car.  A budget will also help you avoid debt, especially high-interest credit card debt, which can charge an average of 20% per annum in interest.

Those in lower income brackets are less likely to budget, even though they need to track their expenses carefully since they have less discretionary money.

If you resist budgeting for any reason, here are some tips on how to budget that can get you started. 

1. Use benchmarks

Before you start budgeting, you may find it helpful to use benchmarks, so you have a rough idea of how to allocate your funds.

The 50/20/30 budget is a good place to start.

The approach allocates 50% of your expenses to "essential living," 20% to financial goals, and 30% to personal spending.  

  • "Essential living" refers to fixed monthly costs like mortgage, food, utilities, and automobile loans.  You can find a more extensive list of typical essential living expenses here.
  • "Personal spending" includes discretionary purchases like dining out, clothes, and vacations.

While these allocations don't work for everyone, often due to high housing costs and other essential spending, it's a good place to start.

Here are some other benchmarks to consider.

  • You should have an emergency fund that covers 6–12 months of expenses.  This fund would be for unexpected health costs, loss of employment, the need to assist family members financially, and other unexpected emergencies.
  • You should save 10%–20% of your gross income for retirement.
  • You will also need to save enough to cover large purchases you plan to make, like a house, a car, or a wedding.

2. Use zero-based budgeting

"Zero-based budgeting" simply takes your monthly income and allocates every dollar to pay your expenses or savings.

The benefit of zero-based budgeting is its simplicity.  Just quantify your monthly income, then calculate your fixed and discretionary expenses.  Fixed expenses include items like your mortgage and utilities.  Discretionary expenses include dining out and buying clothes.  The remaining balance, if any, is used to reduce debt and for savings.

You can see an example of a zero-based budget here.

3. Try other budgeting strategies

If a zero-based budget doesn't work for you, here are some additional budgeting strategies to consider:

  • Envelope budgeting:  Put cash into envelopes for different discretionary spending categories every month.  You can find a helpful list here.
  • Bare Bones budgeting:  Reduce your spending by eliminating discretionary spending like dining out and buying clothes.  Limit your spending to items absolutely essential, like mortgage and automobile loans.
  • Bullet Journal budgeting: Record every expense in a journal.  You can learn more about this budgeting approach here

There are other, less common budgeting approaches.  These include a Japanese budgeting method called Kakeibocalendar budgeting, half-payment budgeting, and paycheck budgeting.

4. Use technology

According to Forbes, "the best budgeting app is one you'll actually use."

Budgeting apps can be a useful adjunct to your budgeting process.  These apps vary in the functions they offer.  Most allow you to connect all your financial accounts, track expenses and establish financial goals.

Some apps like PocketGuard are best for those who want to track spending.  The app's goal is "to help customers spend less than they earn." Others, like Goodbudget, serve those who use envelope budgeting.  You can find a list of leading budgeting apps here.

Once you have figured out the purpose you want the budgeting app to serve, Forbes recommends taking into account fees, security, and customer service.

While the different budgeting strategies and available apps may present daunting choices, there's one clear message:  Budgeting is important for your financial well-being.  

To help you get started, you may consult with a low-cost financial advisor

Darrell Armuth founded Sensible in 1994. Since then, he has served hundreds of clients. Darrell is a Certified Public Accountant certified by the state of Nevada.