Ultimate Guide to Making a Budget

• When most people hear the word ‘budget’ they cringe. Thoughts of No Fun Ever and saving every penny, cutting out every expense that brings them joy—basically living like a miser. But that’s not it at all! A budget simply tells your money where to go so you don’t wonder where it all went.
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• A budget is a plan for your money so that you can maximize its potential while leaving space for spending on what is most important to you.
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• In this article, we’ll outline the different styles of budgeting, how to implement them, and which one is most likely to be your favorite. From here, you’ll be able to identify and use a system that creates a sense of financial peace while aligning your purchases with your values. Does it sound complicated? The good news is that it’s only as hard as you want to make it. You can be elbow deep in the spreadsheets, totally automated, or somewhere in between. The beauty of budgeting is that there’s a method for everyone.
  

• In the simplest terms, a budget is an estimate of income and expenditure for a set period of time. When you use the word as a verb, it means to allow for or provide a particular amount of money. When used as an adjective, it generally means low quality, which is unfortunate and probably doesn’t help with the perception of budgeting overall. A budget is your money plan, to budget is to stick to it, and ‘buying budget’ means you are staying within the allotted amount for purchase.
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• The origin of the English word ‘budget’ is the Latin bulga, which means ‘little pouch’ and probably indicates that what it really roots from is the idea of “this is all I have to spend right now.” While the history of a budget will never truly be known, it’s safe to say that for as long as people were exchanging things for goods and services, the idea of not spending more than you have has existed. The first official US budget was presented in 1789 and has only become more and more complex over the decades. However, it essentially remains the best and only method of tracking income and outflow.
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• Unlike the US government, you probably do not need to run a 1,500 line-item budget for your personal life. In fact, you might already be budgeting right now and not even realize it. If you’ve ever looked at your checking account and did some quick math to figure out how much you can spend each day on lunch this week, that’s budgeting. If you’ve ever put a little money aside each month in order to reach a goal, that’s budgeting too. Let’s get into how you can budget in a more meaningful way.
  

• A budget is simply accounting for your money in minus your money out, with a place for it all to go. Here’s how to start yours.
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• Step 1: Add up your net income
  Net income is your aftertax, takehome pay. If you work one traditional job with a steady static income, this is as easy as adding up your direct deposits. If you, like lots of us, have been able to create passive income streams, or have an ever-changing and less predictable income, here are some tricks to account for it accurately.
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• Make a new calendar that tracks your money as it hits your bank account. Only count real, actual money that you can access. Not the promise of money or ‘how much you could be making if you really hustle’ this month. If you’re new to the irregular income lifestyle, track six months and use the lowest-earning month as your base income. If you’ve been doing this for a while, add up one year’s worth of income and divide by 12. That’s your average monthly income—it’s not perfect, but it’s close.
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• Step 2: Track your spending
  This is a little bit more complex and a lot more eye-opening. Tally up your spending for the past few months and make it a habit moving forward. You can look over your bank account transactions and Venmo statements to do a little forensic accounting work. Even if the spending was out of character or a one-time thing, it still counts. Note which expenses were needs versus wants. Here is a trick to streamline your tracking
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• Updating your spending record is something that you’ll need to do in order to maintain your budget, and the easiest way to do that is by automating the process. Apps like Mint can do this for you, or you can use the antique version: paper and pencil. Lots of people keep a spending note open on their phone to tally up their purchases as they’re made. The method really doesn’t matter, you just need to do it.
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• Step 3: Choose a budgeting method
  Budgeting isn’t a one-size-fits-all financial solution. Personal style definitely comes into play, and luckily, there are a few different budgeting options. Something for everyone! Here are five different popular budgeting styles and how they work.
  

• Traditional budget explained
• This is the regular old budget that springs to mind: Income less expenses equals savings. While this is the cornerstone of all budgeting, it’s an oversimplified approach for most of us. To use this budgeting method, you need to make your lists, check them twice, deduct the difference, and plan for the excess...or how you’re going to make up for the deficit. This works best for people who are brand new to budgeting and don’t know where to start. It’s not so great for people with complicated incomes or more creative thinkers.
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• 50/30/20 budget explained
• Harvard bankruptcy expert and Senator Elizabeth Warren popularized the 50/20/30 budgeting style in her book All Your Worth: The Ultimate Lifetime Money Plan. The 50/30/20 budgeting method is pretty straightforward: allocate your spending so that 50% is spent on needs, 30% on wants, and 20% on saving and investing.
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• For this method to work best, you need to have a clear idea of how to divide your spending into wants and needs, which we will cover in a bit. This method is great for people who wish to simplify their lives without too much effort. Bucketing your funds into three distinct spending categories is just about as simple as it gets.
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• 80/20 budget explained
• The 80/20 budgeting option is even more simple than the 50/30/20. With this method, just send 20% of your income to saving and investing and spend the rest how you please. The power of this budget is that you pay yourself first by saving and investing, then use the rest for your day-to-day expenses. The 80/20 Budget works well for people who make more money than they spend and need to remind themselves to prioritize their future.
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• Zero-Balance budget explained
• The Zero-Balance budgeting method was popularized by financial expert Dave Ramsey. This method requires you to assign every dollar you earn a purpose. At the end of the month, every one of your dollars earned would be spent on housing, food, savings, gifts, etc—with nothing left over. For this method to work best, you either need a very steady and predictable income or one that you’ll be able to anticipate in advance. A Zero-Balance budget is the one to use if you’re very Type A and like to cross things off your list.
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• Envelope budget explained
• The Envelope Budget method is pretty much the same as a Zero-Balance budget, but with one old fashioned twist: it’s cash only. Using this method, you would assign a spending category to your entire income and divide it up. Things like your rent or mortgage will come from your bank account, and the rest will be spent using cash. So for example, if you have $100 budgeted for groceries this month, every time you hit the shop you pay with cash from the “groceries” envelope. (Oh yeah, leave your debit and credit cards at home) This super simple method will whip you into shape, fast. This is best meant for someone who needs to control their spending through drastic means.
  

• A budget is a living, breathing thing that will shift and grow alongside your priorities and finances. Checking in on your goals, your debts, your income, and your expenses is best done every few months. The only way to know if you’re on the right course is to check the map.
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• Action items:
• • Monitor your income

• • Track your spending

• • Choose a budgeting method

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• Financial Housekeeping
• It’s easy to become disorganized. Go through your emails, make a list of all of your accounts and any balances due. If you do carry credit card or student loan debt, include that. Are you able to erase any tiny debts right now? If so, this can be a good time to clear the slate.
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• Action items:

• • List your balances due

• • Pay off any tiny debts you can

• • Create a process for your financial emails

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• Make the time to make it work
• Like we said, this is an ongoing effort, so make a note on your calendar to check in every once in awhile, maybe every three months. If you’re having trouble sticking to a budget plan, try a savings challenge to help you get started. There are also various things you can do to save money like running outside instead of getting a gym membership and starting a vegetable garden in your backyard.
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• Action items:

• • Set a date to review your finances

• • How do you feel the budgeting method is working?

• • Make a note of anything that slips through the cracks

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• Categorizing your needs versus your wants
• When you looked over your spending, you may have noticed some trends in how you were using your money. Every expense can be assigned into one of two categories: Needs and wants. These are highly subjective and will be different for each person. Needs are those bills that you unquestionably, absolutely must pay. These are the things that are necessary for your survival and are most likely fixed costs. These include rent or mortgage payments, groceries, health care, minimum debt payments, and utilities. For some, these bills may include child care, car payments, prescription medicines, or HOA fees. For others, it will be pet care, religious tithing, or commitments to helping out a family member.
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• If you’re having trouble putting something into a category, think of it this way: Would your life be worse off without it? Groceries are a need, Coachella tickets are not. FOMO isn’t an excuse to get into debt and neither is impulse buying.
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• Where we live will also impact our needs. Consider the higher cost of living in cities like Los Angeles and New York City. Certainly living in those cities has its advantages, but it may skew the numbers a bit.
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• Action items:

• • Think on your needs vs wants

• • Is your spending truly aligned with your goals?

• • Are there bigger changes that could impact your finances?

When you compile your list of outgoing expenses, you may come up short. You aren’t alone. In fact, a recent survey of Americans showed that 53% of respondents live paycheck-to-paycheck, meaning they have no money left after all of their expenses are paid. On top of that, more than 1 in 10 can’t even go one week without being paid because they have zero savings and no safety net.

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A budget deficit occurs when expenses outpace income. To resolve a deficit there are two options: earn more or spend less. Earning more can mean monetizing your hobbies, picking up a few shifts a week as a rideshare driver, walking dogs on the weekend or creating a passive income stream. It could mean asking your boss for a raise or having friends and family return the loans you’ve extended to them.

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Cutting your expenses can look like skipping happy hour, packing a lunch, or dropping that gym membership you never use. It can also look like taking a short term loan to pay off high-interest debt or reducing your utility bills by changing your habits.

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When you make these adjustments to your spending and earning, what you’re essentially doing is aligning your budget with your values. If travel is a goal and a priority for you, maybe highlighting that your take-out orders are eating up the funds you could be allocating for airfare will compel you to change your dinner habits.

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Action items:

• • Find what’s causing the deficit
• • Identify small changes that have a big impact
• • Explore your banking options

A surplus occurs when your income outpaces spending. If you run the numbers and have a surplus, that’s great! What you do with it is up to you and your goals, but here are some ideas.

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2. 401k match
3. If you work in a traditional job that offers a 401k with a matching program, absolutely take advantage. Up your contribution as much as you can, but by at least enough to get the full match. When you contribute to your 401k plan, those dollars are taken pre-tax and impact your takehome pay differently than other deductions. It varies based on your individual tax arrangements, so play with your 401k administrator’s calculator to see how it will impact you.
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5. Emergency funds
6. If you don’t already have your mini emergency fund in place, now is the time. Starting a mini-emergency fund of $500 to $1,500 is the first step in establishing a fully stocked emergency fund. This smaller goal will bolster your confidence and go a long way in protecting you from life’s little problems. Because you have this safety net in place, a flat tire won’t cause you to whip out your credit card and go into debt. It’s not just peace of mind, it’s good business.
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8. Your big emergency fund should cover you for three to eight months. The experts all suggest a different number of months to cover, but they all agree on one thing: Get one. To determine the goal amount for your big emergency fund, multiply your fixed expenses (needs) by whichever amount of months makes you comfortable. It will take time to get that amount of money stocked away, slow and steady wins the race.
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10. Get a High Yield Checking Account
11. The best place to stash both of these accounts is in a high-yield account that allows your money to earn interest—but it doesn’t stop there, eventually, the interest will compound. Compound interest is a magical thing. That’s when the interest you’ve earned on your money starts earning interest itself and then that new interest also starts earning interest and it goes on and on. Welcome to the world of your money making money for you.
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13. Debt payoff
14. More than 189 million Americans have credit cards. On average, each household with a credit card carries just over $8,000 in credit card debt. Additionally, the average student debt owed by each borrower is around $32,000. The surplus in your budget is a great opportunity to make a dent in what you owe.
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16. There are several methods of paying down debt, including the Snowball Method. To Snowball your debt, list them all from smallest balance to largest. Pay the minimum due on all of them, and whatever else you can toward the smallest. Once that is paid off, move on to the second smallest, and so on.

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5. Individual retirement accounts
6. Roth IRAs are retirement vehicles that you contribute to with your aftertax dollars, aka the money in your checking or savings account. Because the contributions have already been taxed once, you will not pay taxes again upon withdrawal—even on the gains. This investment is meant for the long-term and comes with some penalties for early withdrawal (before age 59 ½).
   

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6. Investing in the stock market
7. Another option is retail investing. There are lots of options here, including in-person advice from a financial advisor, online-only platforms, roboadvisors, and less traditional strategies like art, gold, and even sneakers. Choosing the right investment strategy involves taking a hard look at your risk tolerance and preference for technology. If you’re new to investing, a good place to start is the official Juno Guide to Investing.
   

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7. Flex your goals
8. While long-term investments are meant for years down the road, what about your short-term goals? Homebuying, travel, starting a business, and taking a sabbatical from work are just some goals that many people save for.
   

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8. Charitable giving
9. Another way to spend your money in alignment with your values is charitable contributions. When you give to organizations carrying out missions you support, you can feel good about being part of an impactful movement. Resources like Charity Navigator will help you find out about a charity's financial health and accountability, as well as governance practices and transparency. When you donate to an accredited organization your contributions are tax-deductible.

Action items:

• • Think about the longterm, invest with it in mind
• • Create a list of short-term goals and take action
• • Set up your emergency funds

Outlining everything in a spreadsheet is great, but how do you make it work? Those numbers mean very little unless you commit to sticking to them in a meaningful way. Of course there will be slip-ups, that’s to be expected, but all is not lost.

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• • Remind yourself of your goals. When you use your money as a tool it can be easier to focus on the end result over instant gratification.
• • Consider buying second-hand. It’s better for the environment and easier on your wallet.
• • Make sure your money is always working for you by getting a high-yield checking account.
• • Review your budget regularly to make sure it’s still working for you. Whether you get a raise or lose a roommate, situations change.
• • Seek professional help if you need to. Debt counselors, financial coaches, and financial educators are all a wealth of information.
• • Don’t make it harder than it has to be. Budgeting is essential for financial health and there is a method that works for everyone.

Your budget is a living document that will constantly evolve to match your income, your expenses, and more importantly—your priorities. Remain realistic, evaluate often, and don’t be afraid to readjust. Budgeting isn’t just about balancing your income, it’s about putting you on even footing for the future so that you can create wealth for yourself and for generations to come.