Your Guide to How to Budget Money - NerdWallet (2023)

If I have take-home pay of, say, $2,000 a month, how can I pay for housing, food, insurance, health care, debt repayment and fun without running out of money? That’s a lot to cover with a limited amount, and this is a zero-sum game.

The answer is to make a budget.

What is a budget? A budget is a plan for every dollar you have. It’s not magic, but it represents more financial freedom and a life with much less stress. Here’s how to set up and then manage your budget.

How to budget money

  • Calculate your monthly income, pick a budgeting method and monitor your progress.

  • Try the 50/30/20 rule as a simple budgeting framework.

  • Allow up to 50% of your income for needs.

  • Leave 30% of your income for wants.

  • Commit 20% of your income to savings and debt repayment.

  • Track and manage your budget through regular check-ins.

Understand the budgeting process

Figure out your after-tax income: If you get a regular paycheck, the amount you receive is probably it, but if you have automatic deductions for a 401(k), savings, and health and life insurance, add those back in to give yourself a true picture of your savings and expenditures. If you have other types of income — perhaps you make money from side gigs — subtract anything that reduces it, such as taxes and business expenses.

Choose a budgeting plan: Any budget must cover all of your needs, some of your wants and — this is key — savings for emergencies and the future. Budgeting plan examples include the envelope system and the zero-based budget.

Track your progress: Record your spending or use online budgeting and savings tools.

Automate your savings: Automate as much as possible so the money you’ve allocated for a specific purpose gets there with minimal effort on your part. An accountability partner or online support group can help, so that you're held accountable for choices that blow the budget.

Practice budget management: Your income, expenses and priorities will change over time, so actively manage your budget by revisiting it regularly, perhaps once a quarter. If you're struggling to stick with your plan, try these budgeting tips.

Before you build a budget

NerdWallet breaks down your spending and shows you ways to save.

SEE YOUR SPENDING

Your Guide to How to Budget Money - NerdWallet (1)

Frequently asked questions

How do you make a budget spreadsheet?

(Video) 4 Budgeting Systems You Need to Know

Start by determining your take-home (net) income, then take a pulse on your current spending. Finally, apply the 50/30/20 rule: 50% toward needs, 30% toward wants and 20% toward savings and debt repayment.

How do you keep a budget?

The key to keeping a budget is to track your spending on a regular basis so you can get an accurate picture of where your money is going and where you’d like it to go instead. Here’s how to get started:

1. Check your account statements and categorize your expenses.

2. Keep your tracking consistent.

3. Identify room for change. Free online spreadsheets and templates can make budgeting easier.

How do you figure out a budget?

Start with a financial self-assessment. Once you know where you stand and what you hope to accomplish, pick a budgeting system that works for you. We recommend the 50/30/20 system, which splits your income across three major categories: 50% goes to necessities, 30% to wants and 20% to savings and debt repayment.

Try a simple budgeting plan

We recommend the popular 50/30/20 budget to maximize your money. In it, you spend roughly 50% of your after-tax dollars on necessities, no more than 30% on wants, and at least 20% on savings and debt repayment.

We like the simplicity of this plan. Over the long term, someone who follows these guidelines will have manageable debt, room to indulge occasionally, and savings to pay irregular or unexpected expenses and retire comfortably.

The 50/30/20 budget

Find out how this budgeting approach applies to your money.

Your 50/30/20 numbers:

Necessities

$0

Wants

$0

Savings and debt repayment

$0

Do you know your “want” categories?

Track your monthly spending trends to break down your needs and wants.

(Video) NerdWallet Finance Tracker Review 2022

Allow up to 50% of your income for needs

Your needs — about 50% of your after-tax income — should include:

  • Groceries.

  • Housing.

  • Basic utilities.

  • Transportation.

  • Insurance.

  • Minimum loan payments. Anything beyond the minimum goes into the savings and debt repayment category.

  • Child care or other expenses you need so you can work.

If your absolute essentials overshoot the 50% mark, you may need to dip into the “wants” portion of your budget for a while. It’s not the end of the world, but you'll have to adjust your spending.

Even if your necessities fall under the 50% cap, revisiting these fixed expenses occasionally is smart. You may find a better cell phone plan, an opportunity to refinance your mortgage or an opportunity for less expensive car insurance. That leaves you more to work with elsewhere.

Leave 30% of your income for wants

Separating wants from needs can be difficult. In general, though, needs are essential for you to live and work. Typical wants include dinners out, gifts, travel and entertainment.

It’s not always easy to decide. Are restorative spa visits (including tips for a massage) a want or a need? How about organic groceries? Decisions vary from person to person.

(Video) How to budget during the pandemic

If you're eager to get out of debt as fast as you can, you may decide your wants can wait until you have some savings or your debts are under control. But your budget shouldn't be so austere that you can never buy anything just for fun.

Every budget needs wiggle room — maybe you forgot about an expense or one was bigger than you anticipated — and some money to spend as you wish. If there's no money for fun, you'll be less likely to stick with your budget.

Commit 20% of your income to savings and debt repayment

Use 20% of your after-tax income to put something away for the unexpected, save for the future and pay off debt. Make sure you think of the bigger financial picture; that may mean two-stepping between savings and debt repayment to accomplish your most pressing goals.

Priority No. 1 is a starter emergency fund.

Many experts recommend you try to build up several months of bare-bones living expenses. We suggest you start with an emergency fund of at least $500 — enough to cover small emergencies and repairs — and build from there.

You can’t get out of debt without a way to avoid more debt every time something unexpected happens. And you’ll sleep better knowing you have a financial cushion.

Priority No. 2 is getting the employer match on your 401(k).

Get the easy money first. For most people, that means tax-advantaged accounts such as a 401(k). If your employer offers a match, contribute at least enough to grab the maximum. It's free money.

Why do we make capturing an employer match a higher priority than debts? Because you won’t get another chance this big at free money, tax breaks and compound interest. Ultimately, you have a better shot at building wealth by getting in the habit of regular long-term savings.

You don’t get a second chance at capturing the power of compound interest. Every $1,000 you don’t put away when you’re in your 20s could be $20,000 less you have at retirement.

Priority No. 3 is toxic debt.

Once you’ve snagged a match on a 401(k), if available, go after the toxic debt in your life: high-interest credit card debt, personal and payday loans, title loans and rent-to-own payments. All carry interest rates so high that you end up repaying two or three times what you borrowed.

If either of the following situations applies to you, investigate options for debt relief, which can include bankruptcy or debt management plans:

  • You can't repay your unsecured debt — credit cards, medical bills, personal loans — within five years, even with drastic spending cuts.

    Your total unsecured debt equals half or more of your gross income.

  • Priority No. 4 is, again, saving for retirement.

    Once you’ve knocked off any toxic debt, the next task is to get yourself on track for retirement. Aim to save 15% of your gross income; that includes your company match, if there is one.

    If you’re young, consider funding a Roth individual retirement account after you capture the company match. Once you hit the contribution limit on the IRA, return to your 401(k) and maximize your contribution there.

    (Video) Financial Priorities: Where To Put Your Money & When | NerdWallet

    Priority No. 5 is, again, your emergency fund.

    Regular contributions can help you build up three to six months' worth of living expenses. You shouldn’t expect steady progress because emergencies happen, and that's when you should pull money from this fund. Just focus on replacing what you use and building higher over time.

    Priority No. 6 is debt repayment.

    These are payments beyond the minimum required to pay off your remaining debt.

    If you’ve already paid off your most toxic debt, what’s left is probably lower-rate, often tax-deductible debt (such as your mortgage). Tackle these when the more-basic goals listed above are covered.

    Any wiggle room you have here comes from the money available for wants or from saving on your necessities, not your emergency fund and retirement savings.

    Priority No. 7 is you.

    Congratulations! You’re in a great position — a really great position — if you’ve built an emergency fund, paid off toxic debt and are socking away 15% toward a retirement nest egg. You’ve built a habit of saving that gives you immense financial flexibility. Don’t give up now.

    Consider saving for irregular expenses that aren’t emergencies, such as a new roof or your next car. Those expenses will come no matter what, and it’s better to save for them than borrow.

    WATCH TO LEARN MORE ABOUT BUDGETING

    (Video) How to Make Money Online With the Nerdwallet Method

    » LEARN: Tips for Canadians on how to budget

    FAQs

    What is the 50 20 30 rule? ›

    One of the most common percentage-based budgets is the 50/30/20 rule. The idea is to divide your income into three categories, spending 50% on needs, 30% on wants, and 20% on savings.

    What is the 70% rule for budgeting? ›

    The biggest chunk, 70%, goes towards living expenses while 20% goes towards repaying any debt, or to savings if all your debt is covered. The remaining 10% is your 'fun bucket', money set aside for the things you want after your essentials, debt and savings goals are taken care of.

    Does the 50 30 20 rule work? ›

    A lot of money experts recommend the 50/30/20 budget, where 50% of your income goes to needs, 30% goes to wants, and 20% goes to savings and debt. I decided to give it a try, but it really didn't work for me — it lead to feelings of self-doubt, decision fatigue, and frustration.

    What is cash stuffing? ›

    The basic premise of cash stuffing is that you set aside cash for different budgeting categories at the beginning of each month. The goal is to spend no more than that cash you've set aside for each category.

    What is the #1 rule of budgeting? ›

    Key Takeaways. The rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must-have or must-do. The remaining half should be split up between 20% savings and debt repayment and 30% to everything else that you might want.

    What is the 40 20 10 rule? ›

    40% of your income goes towards your savings. 30% of your income goes towards necessary expenses (food, rent, bills, etc.). 20% of your income goes towards discretionary spending (entertainment, travel, etc.). 10% of your income goes towards contributory activities (donations, charity, tithe, etc.).

    What is the 80/20 rule in money? ›

    Key points. The 80/20 budgeting method is a common budgeting approach. It involves saving 20% of your income and limiting your spending to 80% of your earnings. This technique allows you to put savings first, and it's both flexible and easy.

    What is the 5/15 75 rule for retirement? ›

    Based on a withdrawal rate of 5% and the replacement ratio of 75% of annual salary, the amount that is required at retirement is 15 times your final annual salary. However, if the numbers were fail-safe and the process was risk-free, retirement would not be the complicated process it has become.

    How much savings should I have at 40? ›

    You may be starting to think about your retirement goals more seriously. By age 40, you should have saved a little over $175,000 if you're earning an average salary and follow the general guideline that you should have saved about three times your salary by that time.

    How much savings should I have at 35? ›

    So, to answer the question, we believe having one to one-and-a-half times your income saved for retirement by age 35 is a reasonable target. It's an attainable goal for someone who starts saving at age 25. For example, a 35-year-old earning $60,000 would be on track if she's saved about $60,000 to $90,000.

    How much is $2000 a week for a year? ›

    $2,000 weekly is how much per year? If you make $2,000 per week, your Yearly salary would be $104,000. This result is obtained by multiplying your base salary by the amount of hours, week, and months you work in a year, assuming you work 40 hours a week.

    What is a reasonable budget for a month? ›

    The basic rule of thumb is to divide your monthly after-tax income into three spending categories: 50% for needs, 30% for wants and 20% for savings or paying off debt. By regularly keeping your expenses balanced across these main spending areas, you can put your money to work more efficiently.

    How much savings should I have at 30? ›

    Savings by age 30: the equivalent of your annual salary saved; if you earn $55,000 per year, by your 30th birthday you should have $55,000 saved. Savings by age 40: three times your income. Savings by age 50: six times your income.

    What bills to pay first when money is tight? ›

    Which Bills Should Be Paid First? Generally, the bills you should pay first are the ones that cover necessities — the main resources that keep you and your family safe and healthy. These necessities include shelter, water, heat and food. Once necessities are paid for, focus on expenses related to your vehicle.

    How can a rich person live paycheck to paycheck? ›

    Some financial planners recommend Americans who are strapped for cash try adopting a 50-20-30 rule to bring their spending into line. This involves allocating 50% of after-tax income to essential expenses, 30% to discretionary expenses, and the remaining 20% to savings, investment and debt reduction.

    What is the 10000 cash rule? ›

    Federal law requires a person to report cash transactions of more than $10,000 by filing IRS Form 8300PDF, Report of Cash Payments Over $10,000 Received in a Trade or Business.

    Should I hide cash at home? ›

    You could lose it to fire or theft, or you could forget where you hid it. Jason Speciner, a certified financial planner at Financial Planning Fort Collins in Fort Collins, Colorado, advises keeping on hand only enough cash to cover about one week's worth of living expenses — and storing it in a fire-proof safe.

    What is the 70 20 10 rule money? ›

    How the 70/20/10 Budget Rule Works. Following the 70/20/10 rule of budgeting, you separate your take-home pay into three buckets based on a specific percentage. Seventy percent of your income will go to monthly bills and everyday spending, 20% goes to saving and investing and 10% goes to debt repayment or donation.

    What are the 3 basics to having a budget? ›

    Track your spending. Set realistic goals. Make a plan. Adjust your spending to stay on budget.

    What is the 80/20 rule of thumb? ›

    What's the 80-20 Rule? The 80-20 rule is a principle that states 80% of all outcomes are derived from 20% of causes. It's used to determine the factors (typically, in a business situation) that are most responsible for success and then focus on them to improve results.

    How much savings should I have at 50? ›

    One suggestion is to have saved five or six times your annual salary by age 50 in order to retire in your mid-60s. For example, if you make $60,000 a year, that would mean having $300,000 to $360,000 in your retirement account. It's important to understand that this is a broad, ballpark, recommended figure.

    How much of paycheck should go to bills? ›

    1. Keep essentials at about 50% of your pay. Things like bills, rent, groceries, and debt payments should make up about 50% of a gross (before taxes) paycheck.

    What is the 10 10 10 money Rule? ›

    Instead of asking yourself how you'll feel about buying something 10 minutes later, Grishman suggests that, unless you're bleeding and in the pharmacy asking for peroxide and bandages, you should actually wait 10 minutes to make the purchase. "The first TEN is a pause button. Wait, stop, don't buy this right now.

    What is the 70 30 rule? ›

    “The 70/30 method is a budgeting technique to help you allocate your money,” Kia says. Put simply, each month, 70% of the money that you earn will be your spending money, including essentials like bills and rent as well as luxuries, and 30% of the money you earn will go towards your savings.

    Which is the biggest expense for most retirees? ›

    Housing. Housing expenses—which include mortgage, rent, property tax, insurance, maintenance and repair costs—remained the largest expense for retirees. More specifically, the average retiree household pays an average of $17,454 per year ($1,455 per month) on housing costs, representing over 35% of annual expenditures.

    How long will $2 million last in retirement? ›

    Assuming you will need $80,000 per year to cover your basic living expenses, your $2 million would last for 25 years if there was no inflation.

    How long will $1 million last in retirement? ›

    Retirement can last 25 years or more after you stop working, according to Fidelity Investments. But in some states with high costs of living, like Hawaii, $1 million in retirement savings would only last about 10 years.

    What is the average 401k balance at age 65? ›

    Many U.S. workers retire by the time they reach 65. Vanguard's data shows the average 401(k) balance for workers 65 and older to be $279,997, while the median balance is $87,725.

    Should you pay off all debt before saving? ›

    Our recommendation is to prioritize paying down significant debt while making small contributions to your savings. Once you've paid off your debt, you can then more aggressively build your savings by contributing the full amount you were previously paying each month toward debt.

    How much 401K should I have at 40? ›

    Fidelity says by age 40, aim to have a multiple of three times your salary saved up. That means if you're earning $75,000, your retirement account balance should be around $225,000 when you turn 40. If your employer offers both a traditional and Roth 401(k), you might want to divide your savings between the two.

    How much money do you need to retire comfortably at age 65? ›

    “Several experts on retirement have given various estimates about how much you need to save: close to $1 million, 80% to 90% of your yearly income before quitting work, and 12 times what you used to make annually.”

    How much is $800 a week Monthly? ›

    When you're making $20 an hour, you'll be earning $800 a week, $3,467 a month, and annually $41,600.

    How much a year is $600 a week? ›

    $600 weekly is how much per year? If you make $600 per week, your Yearly salary would be $31,200. This result is obtained by multiplying your base salary by the amount of hours, week, and months you work in a year, assuming you work 40 hours a week.

    How much is $1,500 a week salary? ›

    For example, if an employee earns $1,500 per week, the individual's annual income would be 1,500 x 52 = $78,000.

    What does a realistic budget look like? ›

    A realistic budget starts with determining your monthly income and then calculating all of your monthly expenses. When determining income, use the amount you bring home after taxes and after any other deductions, such as child support, are taken out.

    How much should I have in my 401k by age? ›

    By age 40, you should have three times your annual salary already saved. By age 50, you should have six times your salary in an account. By age 60, you should have eight times your salary working for you. By age 67, your total savings total goal is 10 times the amount of your current annual salary.

    What is the average bank balance of an American? ›

    How much does the average household have in savings? While the median bank account balance is $5,300, according to the latest SCF data, the average — or mean — balance is actually much higher, at $41,600.

    What does the average American have in savings? ›

    This data is the latest available from this source but is from 2019, and some sources put average savings even higher: Northwestern Mutual's 2022 Planning & Progress Study revealed that the average amount of personal savings (not including investments) was $62,086 in 2022.

    What do the 50 30 20 and the 70 20 10 rule have in common? ›

    The 70/20/10 budget is similar to another money management method you may have heard about — the 50/30/20 budget. With the 50/30/20 rule, half your income goes to needs, 30% goes to wants and 20% goes to savings and other financial goals like investing or paying off debt.

    Why is the 50 20 30 rule easy to follow? ›

    The 50/30/20 rule is an easy budgeting method that can help you to manage your money effectively, simply and sustainably. The basic rule of thumb is to divide your monthly after-tax income into three spending categories: 50% for needs, 30% for wants and 20% for savings or paying off debt.

    What is the 60 40 rule for savings? ›

    The idea is that you'll save 20% or 40% of your income off the top, allowing to do whatever you want with the remaining 60% or 80% of your income. Yes – I see real wisdom in automatically saving such a big percentage of your income. Following this plan for a few decades could set you up for a great retirement.

    Does the 50 30 20 rule include 401k? ›

    This rule of thumb says that those expenses should comprise no more than 50% of your take-home pay. The next 20% of your budget goes to long-term savings and extra payments on any debt you may have. For example, this bucket would include contributions to your 401(k) or IRA.

    What is a reasonable amount of spending money per month? ›

    When it comes to how much you should spend and save each month, NerdWallet advocates the 50/30/20 budget. With this formula, you aim to devote 50% of your take-home pay to needs like rent and insurance, 30% to wants like gym memberships and vacations, and 20% to debt repayment and savings.

    How much should I have left after bills? ›

    As a result, it's recommended to have at least 20 percent of your income left after paying bills, which will allow you to save for a comfortable retirement. If your employer offers matching 401(k) contributions, take advantage so you can maximize your investment dollars.

    What are the four walls? ›

    As Dave Ramsey lists them, the four walls are food, shelter (including utilities), transportation, and basic clothing.

    What is the Rule of 70 The Rule of 70? ›

    The rule of 70 is used to determine the number of years it takes for a variable to double by dividing the number 70 by the variable's growth rate. The rule of 70 is generally used to determine how long it would take for an investment to double given the annual rate of return.

    Is 4 million enough to retire at 65? ›

    A nest egg worth $4 million can provide many retirees with enough money for everyday expenses, as well as general freedom to do what they want. If you're preparing to retire with $4 million, there's a number of specific tasks you'll want to complete to ensure your continued success.

    What is the 80/20 rule in savings? ›

    Key points. The 80/20 budgeting method is a common budgeting approach. It involves saving 20% of your income and limiting your spending to 80% of your earnings. This technique allows you to put savings first, and it's both flexible and easy.

    What is the 5 year rule for 401k? ›

    Roth 401(k)s and Roth IRAs offer the ability to receive tax-free income in retirement. To avoid taxes and or penalties, accounts must be held for five years, and the individual must be at least age 59 ½, disabled, or have died. Each of the five-year rules are measured from the beginning of the tax year for they apply.

    What is the 10 year rule for 401k? ›

    The 401(k) 10-year rule and how it works

    If the account owner died in 2020 or later, non-spouse beneficiaries must withdraw all funds by the end of the 10th year of the account owner's passing or be subject to a 50 percent penalty on any remaining account assets.

    What is the 25x Rule retirement? ›

    The 25x Rule is simply an estimate of how much you'll need to have saved for retirement. You take the amount you want to spend each year in retirement and multiply it by 25. Generally, you can look at your current salary to get an idea of how much you might be able to comfortably live off in retirement.

    Videos

    1. 5 Strategies to Make Your Money Work for You
    (NerdWallet)
    2. How Much House Can You REALLY Afford? | NerdWallet
    (NerdWallet)
    3. Budgeting for Beginners - How to Make a Budget From Scratch 2021
    (Debt Free Millennials)
    4. How To Manage Your Money (50/30/20 Rule)
    (Marko - WhiteBoard Finance)
    5. 12 Ways To Build Wealth With Side Hustles | NerdWallet
    (NerdWallet)
    6. How Do I Make A Budget And Stick To It?
    (The Ramsey Show - Highlights)
    Top Articles
    Latest Posts
    Article information

    Author: Greg O'Connell

    Last Updated: 12/18/2022

    Views: 6147

    Rating: 4.1 / 5 (42 voted)

    Reviews: 89% of readers found this page helpful

    Author information

    Name: Greg O'Connell

    Birthday: 1992-01-10

    Address: Suite 517 2436 Jefferey Pass, Shanitaside, UT 27519

    Phone: +2614651609714

    Job: Education Developer

    Hobby: Cooking, Gambling, Pottery, Shooting, Baseball, Singing, Snowboarding

    Introduction: My name is Greg O'Connell, I am a delightful, colorful, talented, kind, lively, modern, tender person who loves writing and wants to share my knowledge and understanding with you.