How to Make a Budget

Living without a budget could make you vulnerable to unexpected expenses, yet living on a budget can feel restricting. People struggle to budget because the process can feel daunting and difficult to sustain over the long term. The trick to success is to set goals and build in some flexibility.

The first step to budgeting is a slight mind shift. The word “budget” isn’t usually one that sparks joy, but it helps to think of budgeting as a means to an end. Don’t forget to set some funds aside for fun, whether it’s catching a play or getting a hot stone massage. Try to build in some flexibility for mistakes or unexpected price increases, such as a sudden rent hike or higher insurance rates.

The next step is drawing up an actual budget, for which there are many different methods. Here are some to consider.

Different budgeting methods

The 50/30/20 rule 

Using this method, try to allot no more than half of your total monthly budget toward essentials such as rent or mortgage, transportation, groceries and utilities. Another 20 percent should go toward savings and 30 percent can go toward personal items.

Savings can go toward short-term and long-term financial goals, such as 401(k)s or individual investments, or starting a savings account or CD. The last 30 percent is considered flexible—it’s to be used for things you want but don’t need. That includes eating out, traveling or taking a trip to the theater.

Reverse budgeting

Traditional budgeting entails adding up all expenses and allocating the remaining cash toward savings. With reverse budgeting, the priority is on saving.

Based on your savings goals, you set aside a certain amount of money from each paycheck that will go toward savings, then put the remaining amount toward essentials. Whatever is left after that is considered discretionary cash.

The upside to reverse budgeting is that it’s fairly low maintenance but allows you to save while not tracking every penny. How much to set aside for savings is up to you, of course, and should be adjusted as needed. One way to approach this is by writing out goals, whether it’s buying a house or a motorcycle, including how much you’ll need to save to reach that goal and when you’ll need it by. Then calculate how much you can put toward that each month.

You can set up automatic transfers from your checking into your savings or IRA account. Automated contributions from your paycheck to your 401(k) also count.

60 percent solution

This is similar to the 50/30/20 rule, but instead of spending 50 percent on essentials, 60 percent goes toward fixed “committed expenses”—your essentials.

The remaining 40 percent is split into 10 percent increments for retirement, long-term savings, short-term savings and fun money. The 40 percent can be divvied up differently depending on your circumstances and goals. So if debt reduction or a big trip is on the horizon, bump up savings in one of the categories.

First proposed by Richard Jenkins, former editor-in-chief of MSN Money, this solution emphasizes keeping essential expenses at or around 60 percent to avoid overspending and running into debt. To avoid dipping into your savings, it could be a good idea to set up a separate savings account, or accounts.

Zero-based budgeting

This is a method of budgeting in which all spending is accounted for. In other words, you need to make sure all your expenses and savings match up exactly to what you have coming in.

To get started with this method, calculate how much monthly income you have from salary, benefits or other sources of income. Then write down all monthly expenses, seasonal expenses and any irregular expenses, such as quarterly insurance payments. It’s a good idea to track all monthly expenses for a couple of months to identify trends and areas where you could cut back. Then, create a budget that covers all your expenses—essentials, long-term savings and short-term savings for a trip or new car—and make sure your spending matches the budget.

Commonly used within companies, this method takes the most work and requires you to keep careful tabs on all your spending. On the upside, you’ll know exactly where your money is going and what you need to do to adjust.

Sticking with it

Tracking and budgeting can feel tedious, but there are quite a few apps these days that can help you track your spending. It also helps to pare down the number of cards you use so you have fewer accounts to keep track of.

If your budget isn’t working, make the needed changes. A budget isn’t something that’s set in stone. Building in some flexibility gives you the best chance to stick with it and to reach your goals.

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.