Budgeting Made Easy

Learn how to make a budget that actually works for saving money and avoiding debt.

Budgeting used to be a huge hassle, either sitting down with pen and paper or pulling out a spreadsheet. But these days, technology makes budgeting infinitely easier. You probably have access to a range of free tools that can help you track your spending daily. The right budgeting tool can help you save money, avoid debt and maintain financial stability.

The key to a successful budget plan is prioritizing and tracking. –Richard Best, DontPayFull.com #FinancialTips Click To Tweet

The information in this section will teach you the basics of budgeting. These tips generally apply, no matter what type of budgeting strategy or tool you use.

The Basics of Budgeting

What should a personal budget include?

There are four basic elements that make up any household budget:

  1. Income
  2. Fixed expenses
  3. Flexible expenses
  4. Discretionary expenses

Income isn’t just limited to money you receive from paychecks. It can also include government benefits, alimony or child support, and even returns on investments.

You may be on a tighter budget than your friends, but that doesn't diminish your worth in any way. –Dawn Meehan #FinancialTips Click To Tweet

Every budget also has three basic types of expenses. Fixed expenses and flexible expenses are both necessities. But fixed expenses have a set cost that stays the same every month, like mortgage or rent payments and insurance. Flexible expenses are also necessities, but the cost varies month to month, like for groceries or your electric bill.

Discretionary expenses cover your wants. They also tend to have costs that change from month to month, but not always. For instance, a Netflix subscription has a consistent cost, but it’s not a necessity. A good budget should always keep wants separate, so it’s easier to cut back if you see you’re overspending.

Types of expenses vs. categories

Most budgeting tools don’t break up purchase by those three types of expenses. Instead, they categorize your expenses. So, the tool may automatically separate out food transactions and fuel transactions. Categories of expenses can be helpful for setting target spending limits. But you should still keep types of expenses in mind.

Budgeting may not be the most fun task in the world, but it’s surely one of the most beneficial. –Logan Allec, Money Done Right #FinancialTips Click To Tweet

For instance, we recommend dividing your food budget into two separate categories: groceries and dining out. Groceries are a flexible expense because food is a necessity. But eating out is a luxury and tends to cost more. So, if you make dining out a separate category, you maintain a budget that keeps your needs and wants separate.

How to balance your budget

A good personal budget prevents overspending by balancing expenses versus income. But it’s not just about keeping total expenses below your total income. If you spend every dollar you earn, that’s doesn’t make you financially stable. A truly balanced budget has built-in money for saving, plus leaves some breathing room for unexpected expenses. This is known as “free cash flow.”

In order to maintain financial stability, you should only spend about 75% of what you earn. Your income-to-expense ratio should be 1.25 or greater.

Using Your Budget Day-to-Day

Personal budgeting only works if you use it consistently. If you make your budget and then ignore it, you will probably overspend. Overspending usually leads to credit card debt, because you pull out the plastic to cover gaps in your budget.

How to maintain and adjust your budget

Budgets are not set in stone. In fact, they fluctuate throughout the year and as you needs change. This means you need to regularly adjust your budget to suit your needs and seasonal expenses. You also need to adjust your budget anytime there is a change in your financial situation. If you lose your job, get a raise, take a pay cut or add a new expense, you should revisit your budget. That way, you can adjust it accordingly and maintain financial stability.

Separating monthly savings from cash flow

One mistake that people often make in budgeting is how to treat savings. Some people think savings is the same as free cash flow – i.e. you save whatever you have left at the end of the month. But this is a good way to never save anything!

Instead, you should treat savings as a fixed expense. You see how much you can afford to save each month – ideally, 5-10% of your income. Then you set that amount as a fixed expense. It’s like a bill that you pay yourself each month.

If you keep that 5-10% separate from the 25% of your income that you maintain for free cash flow, you protect your savings. This ensures that you don’t drain your emergency savings each month on those unexpected expenses that inevitably come up.

Using a personal budget to manage debt

Another way budgeting helps you is by making it easier to manage debt. Debts generally fall into one or two categories, depending on your financial situation. Debts like mortgages and your car payment are always fixed. But credit card debt can be fixed or flexible. If you pay off any charges you make in-full every month, it tends to be a flexible expense. However, if you have balances to pay off, it’s often better to make the payments a fixed expense.

Where to find the right budgeting tool

There are plenty of ways that you can gain access to good budgeting tools for free. Or, if you prefer, you can pay for software or an online platform if it suits your needs.

  • Check your checking account first. Many banks and credit unions offer a free budgeting tool as part of their online and mobile banking platforms. This can be beneficial, since it’s already integrated with your main account.
  • Look online or in your app store. There are plenty of free budgeting tools available online or in the app store for your favorite mobile device. Just make sure they’re well-reviewed and secure, since you will need to link it up to your financial accounts.
  • Use desktop budgeting software. If you’re concerned about the risk of unauthorized access online, find a budgeting software for your home desktop. This will help you budget without increasing your risk.

If none of those options suit your needs and goals, then you can go old-school. Either do pen and paper budgeting or build your own spreadsheet. We offer some free worksheets that can help you get started:

Spending Planners

Special events throughout the year, like holidays and vacations, have a way of busting your budget. One-off expenses, including gifts, decorations, party planning, and travel can quickly stack up and lead to overspending.  These expenses often end up on high interest rate credit cards, increasing the balances you need to pay off. Creating spending plans for these special events can help you avoid overspending and excess credit card debt.

A summer budget can help your family enjoy a summer vacation without debt

Vacation Budget Planner

A 2019 survey found that over three-quarters of Americans who plan to travel this year will use credit cards to fund the trip. Use our free vacation budget planner to plan an affordable vacation that won’t lead to credit card debt.

Set your vacation budget now »

Back to school shopping budget

Back to School Budgeting

The back to school shopping season is the second most expensive time of the year for families. The average cost is almost $700. This guide can help you build a back to school budget that won’t lead to overspending and credit card debt.

Set a practical back to school budget »

Use these holiday budget tips to avoid debt

Holiday Spending Planner

If the winter holiday shopping season always leads to a mountain of credit card debt for you, you’re not alone. The average family spends over $1,000 to make the season merry and bright. Use Consolidated Credit’s holiday survival guide to set a holiday budget that won’t break the bank as you bring joy to your family and friends.

Make a debt-free holiday spending plan »

Valentine's Day Spending Planner

Valentine’s Day Spending Planner

Valentine’s Day is the third most expensive holiday for most consumers (after Christmas and Mother’s Day). The average Valentine’s Day shopper shells out almost $150 to spread the love. Our Valentine’s Day Spending Planner can help you stay on budget.

Make a Valentine’s Day spending plan now »

Teaching Your Kids to Budget

Budgeting 101 for College Students

College students don’t usually take the time to budget. That’s a mistake, especially if you have a credit card with you during your school years. It’s easy to forget how much you’re spending if you don’t keep a budget and track your finances. That’s how college students fall further into debt and end-up not saving money for the future.

Budgeting for Kids

With the unruly nature of our economic times it’s wise to get your kids involved with budgeting. Teaching your children the value of a hard-earned dollar and understanding the consequences of overspending, are valuable life lessons that can carry them through their lives. Budgeting will give them the groundwork they need to begin a life of sound financial decisions.

Reviewed by :
Meghan Alard [email protected] Financial Literacy Specialist