UCR School of Business Assistant Professor of Accounting Eric Allen was asked to provide expert insights on Budgeting for an article recently published on WalletHub.

 

What are some benefits to having a budget?

The best way to think about a budget is that it's a plan. Like all good plans, making one forces you to get intentional and really think about what resources you have and how to use them. A budget also gives you a framework to evaluate future decisions, so you're not just making financial choices in the heat of them moment without consideration of your overarching goals. And even if you don’t follow it perfectly, it still gives you a clear picture of what you thought would happen versus what actually happened — and that comparison can be really eye-opening and helpful.
 

Are there any downsides to budgeting?

Budgeting can be time-consuming, and if you don't put enough time into it, you'll have one that doesn't match your actual situation. Also, remember it is just a plan, and life can be unpredictable. If you're too rigid about sticking to the original budget instead of adjusting with changing circumstances, it can feel stressful and discouraging. A budget should be a guide not a trap.
 

Do you have any tips to help people create and stick to a budget?

Like any habit, it's good to 'ritualize' the process. Set aside time each week, to check in on the budget and make any updates. The more you make the budget part of your regular routine, the more likely you'll use it, and the habit will stick. Also, if you typically hate anything related to dealing with financials, look at it as another way to learn - in this case, about yourself. What you value, how you spend, and what makes you feel secure. If you approach it that way, and allow yourself to be flexible as things change, you'll be surprised how much you can learn from the process.

 

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A budget is a plan that outlines how much of your income should go to different parts of your finances, from monthly bills and day-to-day purchases to savings, charitable donations and investments. Having a budget helps you stay organized while moving toward your financial goals and holding yourself accountable.

Unfortunately, budgeting isn’t something that’s often taught in schools, despite 94% of the country thinking it should be, according to a WalletHub survey. The good news is that it’s a skill that’s never too late to learn, and it’s actually a lot easier than it seems.

Below you can learn even more about budgeting, from why it’s important to how to actually go about doing it.
 

Key Things to Know About Budgets
 

• Importance of Budgeting: Having a budget is important because it keeps you organized and can improve your financial status. Other benefits include building discipline and feeling like you’ve accomplished something.
• Creating a Budget: To build your budget, first gather information on your income and expenses. Then, set goals, choose budgeting tools, prioritize your expenses, and allocate money based on your priorities.
• Tracking Your Budget: You’ll need to track your budget progress each month and reassess from time to time, to make sure you’re on the best financial path possible. It’s also important to be honest about your spending and whether you meet your goals. Nearly 1 in 5 Americans aren’t honest with themselves while budgeting.
• General Budgeting Guidelines: Many people recommend setting aside 50% of your income for necessities, 30% for “wants,” and 20% for other things like building your savings or paying down debt. This is called a 50/30/20 budget.
• Different Budgeting Strategies: With a “zero-based budget,” you focus on making your income minus your expenses equal $0, regardless of specific percentages. An “envelope budget” can help you tangibly lay out cash for each spending category. And a “pay yourself first” budget prioritizes saving and investing.

Why Is Budgeting Important?

There are many reasons why having a budget is worthwhile – and even essential – for everyone. They include:

• It improves your financial situation. Budgeting helps you avoid overspending, and it helps you work toward goals like building an emergency fund, paying down debt, growing your investments, or saving for a big purchase. Sticking to a budget can also help improve your credit score.
• It helps you stay organized. Knowing exactly how much you plan to spend on each item in your budget makes it easier to set money aside and track your progress each month. People who have a budget feel significantly more secure, confident and in control of their lives, according to a survey by the Certified Financial Planner Board of Standards.
• It expands your knowledge. Budgeting gives you a better idea of how much you’re spending relative to how much you earn, as well as what you’re spending your money on.
• It builds discipline. Sticking to your budget may involve passing up on things that you want, which can build self-control and other good habits. Only 1 in 5 Americans with a budget say they exceed it, according to a recent WalletHub study.
• It gives you a sense of accomplishment. Budgeting may not be fun, with 27% of Americans saying they’d rather do laundry and 20% saying they’d rather do their taxes. But once you have a budget, you’ll find that setting goals and achieving them feels good, especially when it also leads to growing your net worth or reducing your debt.
  
   

How to Make a Budget

Making a budget might seem daunting at first, but it’s actually pretty simple once you break it down into the proper steps. Plus, once you make a budget for the first time, you’ll have the skills you need to update it as your financial needs change.

• Gather information: Figure out how much money you take home each month, and then come up with a list of your monthly expenses and how much they typically cost.
• Set goals: Decide what you want your budget to accomplish, such as getting debt-free in a certain time period, growing your emergency fund to a certain amount, saving up for a big trip or investing a certain amount every month. Your goal can even be as simple as staying organized and spending less than you make.
• Use tools: There are a number of free and paid budgeting tools available that can simplify the process.
• Prioritize: Divide your expenses into categories of high, medium and low priority. High priority means you must put money toward them. Medium priority means you should allocate them some funds, but they’re not the most important. Low priority means you can do without them.
• Plan: Decide how much money to give to each item on your budget. You can start by setting aside money for all your mandatory bills, and then divide the remaining money between your personal “wants” and more important things like paying down debt, saving, and investing.
• Track your progress: Use your budgeting tools to automatically or manually track your spending each month. See whether you are able to stick to your budget or you frequently exceed it.
• Reassess: The budget you make now won’t necessarily be the right budget forever. If you meet one of your goals, you can set a new one and adjust accordingly. In addition, if you’re having trouble with your current budget, you may need to go back to the drawing board.

Budget Example

Below is an example budget for a typical American household, broken down into some common expense categories the household might have. This example is based on the real median household income, which is around $64,200 per year or $5,350 per month, after taxes. Keep in mind that actual incomes and expenses will differ widely by person and location.

In general, many sources say that you should follow a 50/30/20 structure with your budget, spending 50% on “needs,” 30% on “wants,” and 20% for savings and paying down debt. As you can see, though, it may be difficult to keep your “needs” to 50% of your budget during this inflationary period (the example budget above spends 62% on “needs”). In addition, it may be wiser to spend a higher portion of your budget on things that will help you financially, like paying off debt and building your savings, rather than things you simply want to have but don’t really need.

You can learn more about budgeting with WalletHub’s helpful budgeting tips guide. You can also join WalletHub for free to gain instant access to our budgeting tools.
 

Types of Budgets

There are several different types of budgeting strategies you can use, and you may want to try out various ones in order to see which works best for you.

50/30/20 Budget: You put 50% of your income toward your “needs,” 30% toward your “wants,” and 20% toward debt payoff, savings, and investments. This budget allocation is a good general rule of thumb, but you don’t need to strictly follow the recommended percentages, especially if your “needs,” or essential expenses, take up more than 50% of your income.

Zero-Based Budget: Zero-based budgeting focuses on ensuring that you don’t spend more than you make, requiring you to assign every dollar you make to a specific expense. Its concept is simple – your income minus your expenses should equal $0, regardless of how you distribute the money.

Envelope Budget: This is a budgeting style for people who want to make sure they don’t spend too much in one specific category. Essentially, you put a certain amount of money into “envelopes” each month for each spending category. This can be actual physical envelopes with cash or just virtual envelopes on a spreadsheet. Each time you pay for an expense, you take money out of the envelope, and once it’s empty, you’re not allowed to spend any more in that category.

Pay-Yourself-First Budget: Unlike other types of budgets, this one focuses the most on your future. It stresses that the first thing you should do each month is set aside a certain amount of money for savings and investments. After you’ve done that, you can divide the rest of your budget between essential expenses and things you want. This type of budget is good for people who want to make sure they don’t treat saving and investing as an afterthought.

The No-Budget Budget: This is the loosest type of budget, and we don’t recommend it over other types. With this budgeting strategy, you just focus on the things you absolutely must pay for each month. As long as you track your spending and set aside the money you need for those essential expenses, you can spend the rest of your money on whatever you want, without a defined plan. Budgeting this way is better than nothing, but planning out all or most of your monthly expenses in detail is always better.

 

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All images courtesy of  Google Gemini AI