Key insights:
- A basic budget begins with calculating your net income, which is your earnings after deductions like taxes, to determine your available spending amount
- Categorizing your spending into necessities and wants can help track your expenses and establish both short- and long-term financial goals
- Popular strategies like the envelope method and the 50/30/20 rule can help allocate funds effectively based on your financial priorities
- Your budget can evolve as your income, expenses and goals change, so review and adjust it to keep it aligned with your lifestyle and goals
A budget is a way to plan your spending each month, balancing what you earn with what you intend to spend. Budgets can be useful for everyone, especially for people who are tackling debt, saving for short- or long-term goals or new to personal finance.
Let’s examine how budgets work and how they might be useful for you.
Budgeting basics to know
Creating a budget is a step-by-step process that involves reviewing your earnings and assessing your spending needs and habits. Let’s walk through the considerations.
Calculate your income
Your budget starts with your net income. Your net income is the total amount you take home on a monthly basis. It’s different from your gross income, which is your earnings before deductions such as taxes and health insurance. For budgeting purposes, it’s important to consider only the funds that you earn after deductions. This is the money you can spend each month.
Your net income may include earnings from your main job and side job, but it might also include money you receive from interest on your accounts, dividends from investments or any other funds you collect regularly.
List expenses
After estimating your income, you’ll want to create a projection of your monthly bills and expenses.
Start with your necessities, including your rent or mortgage payment, groceries, commuting costs and any other essential living expenses. Then, estimate your discretionary spending, including expenses like dining out, entertainment, shopping or hobbies. Understanding both your needs and your wants can help you build a budget that supports your financial goals while leaving room for things you enjoy.
If you are unsure where to start, review your recent bank statements to see how you’ve been spending your money. Looking at your actual spending habits can give you a clearer picture of your monthly expenses and help you identify opportunities to cut back, such as recurring subscriptions you no longer use or frequent takeout purchases.
Create financial goals
The next step to creating a functional budget is identifying your short- and long-term savings goals. Short-term goals might include paying off your credit card in full, saving for a vacation or building up an emergency fund. Long-term goals might include paying off a home, saving for a child’s education or planning for retirement.
You may decide to put aside funds for both types of goals at once. For example, you might put aside a portion of your income in a savings account to use on a future vacation while putting another portion in a 529 account to save for your child’s college tuition.
Allocate funds
After you have calculated your earnings and expenses, compare them. If you make more money than you’re spending, you have surplus funds at your disposal. If you make less, you have a deficit.
If you have a surplus, consider saving those funds and allocating them to your short and long-term financial goals. If you have a deficit, review your spending and look for ways to cut back to avoid accumulating debt. Even if you have a surplus, there may be ways to start saving more by cutting back on non-essentials.
Review and adjust your budget
Your income, your spending needs and financial goals may change at different times in your life. Whether it’s because your rent increased, you received a raise at work or you paid off a long-term debt, your budget won’t be set in stone forever. Periodically review your budget to make sure it continues to align with your lifestyle and financial objectives.
Budget methods to explore
There are a few tried-and-true budgeting strategies that may work for you, depending on how you prefer to save and how you like to visualize your spending roadmap. Let’s look at a few examples.
| 3 Common Budgeting Methods | ||
| Zero-Based Budget | 50/30/20 Budget | Envelope Budget |
|---|---|---|
| Assign every dollar of your net income to a specific expense or savings category until your balance reaches zero. | Divide your monthly income by percentages, allocating half for your needs, a smaller portion for your wants, and the remainder to your savings goals. | Divide and place your net pay into physical envelopes for different spending categories to visualize your monthly spending limits. |
Zero-based budget
Zero-based budgets dedicate every cent you make to a given category so that all of your spending is accounted for. Assign each dollar of your net income a job, from paying for essentials to building your emergency fund, until there's nothing left to allocate.
Let’s say you make $3,800 each month. You estimate that you spend $1,800 a month on your necessities like rent, groceries and fuel. You then allocate an additional $1,000 to things you like, like restaurants, concert tickets and new clothes. You’re left with $1,000, which you dedicate to savings goals like down payments, debt repayment and your emergency fund. At the end of the month, you’re left with $0, having used all your money for a specific purpose.
Envelope budget
The envelope budget is very simple and may be effective for people who like to visualize savings more clearly. Start by writing down different spending categories and goals on different envelopes. Each time you get a paycheck, divide your earnings into the different envelopes. What you have in each envelope is your monthly budget for that category. The classic envelope method involves physically putting cash in envelopes, but you may choose to use a budget spreadsheet or an app instead.
50/30/20 budget
The 50/30/20 budgeting method is a simple way to divide your income into spending categories. The numbers stand for different percentages of your income: 50% of your income goes toward your monthly necessities, 30% goes toward your monthly “wants,” and the last 20% goes toward savings for your short- and long-term goals.
Using this method, if you’re making $3,800 per month, 50% of it ($1,900) would be dedicated to your necessities, 30% ($1,140) would go toward your wants and 20% ($760) would go toward your savings goals. The 50/30/20 budget provides a rough model for budgeting, but the exact numbers won’t necessarily align for everyone.
For instance, some people may need to devote more to their necessities or savings. The 50/30/20 model can provide helpful benchmarks if you’re just getting started with a budget, ensuring you always put some money into savings.
Discover budgeting resources and financial planning tools with Citi
Your budget is personal, and it should reflect the way you want to live now and in the future. As your life changes, your budget will change to reflect where you are. If your income isn’t currently meeting your needs, a budget might help you identify ways to cut back or make lifestyle changes.
From deposit accounts to mobile banking features, Citi offers a range of products to help you achieve your goals. Explore Citi Financial Pathways today to access financial planning tools and resources to help meet your needs.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
