How to Save Money with a Budget
Get financially organized starting today. This quick and easy guide can show you how.
What’s a budget, and why do you need one?
- Your budget is like a blueprint for your money plans
- Things to track: Income and expenses
- You never want your expenses to exceed your income
What is a budget, anyway? Think of it as your money blueprint. You wouldn’t build a house without a blueprint. The same goes for planning your financial life.
You might think a budget will impose unfair limits on your life, almost the way a restrictive diet does. And rather than giving you a sense of control, you might think it will only show you how much money you don’t have.
But a budget isn’t only about restrictions. It’s about becoming sensible and grown up with your money and your spending. Money is a resource. For most people, it’s not infinite. And by learning how to create a budget and make a budget work for you, it can help you protect your resources.
In a nutshell, budgets can help you track two things: how much money you have coming in each month, and how much is going out.
The money coming in is known as your “income,” and it is the money you have left over in your paycheck after taxes and other deductions.
The second amount is how much money you spend each month. That’s known as your expenses. And it’s everything you spend money on, from that pizza and soft drink for lunch, to that night out at the movies, or what you’re paying for rent or your car loan.
Generally speaking, a budget will help you balance your expenses—the money spent each month—with your income, or the money coming in.
You never want your expenses to exceed your income. In fact, you want enough of your income left over each month so you can save, and eventually invest.
How to create a budget
- Creating a budget isn’t hard
- Divvy up your fixed and variable expenses
- Budgets are flexible and should change over time
Coming up with a budget plan may sound intimidating, but it isn’t all that hard.
First, write down your monthly income
You can jot down your income on a piece of paper, in a spreadsheet, or where ever makes you comfortable.
For most people who get a paycheck, there are two numbers to keep in mind. You need to learn the difference between your gross income—which is the total amount of money you make, and your net income, which is how much money you actually receive, once your taxes and other deductions, such as Social Security and Medicare, have been taken out.
For the purpose of your budget, your net income is what you need to concern yourself with, as it is the amount of money you have to live on each month.
Next, list all of your expenses
Generally speaking, there are two types of expenses you should be aware of. The first one is called a fixed expense. That’s an expense you have to pay every month no matter what, and it won’t change very much over time. Examples are your mortgage or rent, student loans or any other type of debt that you must pay back, and health insurance premiums.
The next kind of expense is called a variable expense, and that’s something you do have control over. These are the things that you spend money on, that change over time, such as movies and entertainment, clothing, groceries, and vacations.
Once you’ve got your expenses sorted out, the goal is to balance your expenses with your income. Make sure it all adds up.
The 50-30-20 budget
To make this easy, some people follow something called the 50-30-20 rule. That simply means 50% of their income will go toward fixed expenses. 30% will go toward variable expenses, and 20% will go to savings.
There is no one-size-fits-all budget, however. A budget is as unique as you are, and you can come up with your own numbers.
If your expenses are more than your income, you need to head back to your budget and figure out why that is. First, check your variable expenses. Are they too high? Did you allocate $200 for groceries, and you’re really spending $300? If so, maybe you need to cut back on your supermarket trips or move money from another category where you are spending less than you expected.
For example, maybe you’ve allocated $50 for an energy bill, and you’re only paying $35. Congratulations—that’s extra money you can allocate somewhere else or hopefully put into savings.
Remember, budgets are living, breathing things, and no two budgets are the same. They should suit your lifestyle.
The goal is for you not only to meet your expenses but to put away money into savings each month, which is critical when you’re getting your financial life together. Once you start saving, you’ll be well on your way to financial freedom, which can include investing for the long term.
Money saving tips
- Think about eliminating some variable expenses
- Create an emergency fund
- By cutting down on expenses and debts, your savings should increase
Your budget should help you to sort all of your spendings into specific categories. It will tell you how much you’re spending each month, and on what. It will also tell you how much money you’re saving.
You can make a lot of headway on your savings by reducing your fixed expenses by either shrinking or eliminating your variable expenses.
As you eliminate or cut down on expenses and debts, your savings should increase. And if you know how much you’re saving, your goal can always be to increase your savings.
Here are some things to consider:
Pay yourself first
That means funding all of your savings accounts first. People will often say they don’t have enough money at the end of the month to put into savings. But if you get into the habit of taking a chunk of your paycheck and putting it into savings first, the rest of your spending could fall into place.
Automate your savings
Take the guesswork out of things, and automate your savings. Once turned on and linked to your checking account, Smart-Save can automatically transfer money from your checking account to your Stash Invest account when you have the cash to spare.
Set up an emergency fund
This is money you set aside for unexpected life events, that sudden car repair, medical expense, or layoff. The general rule of thumb is that you should set aside three to six months of expenses.
Refinance your student loans
Federal student loans carry an average interest rate of about 4.5% for undergraduates and 6.3% for graduates, according to recent reports. While federal loans give you plenty of flexibility, including the ability to make deferrals on payments, and options for needs-based repayment, some private lenders can offer you lower repayment terms, that could potentially save you hundreds of dollars each year.
The same goes for any other debt, like credit card or mortgage. Look for cheaper rates.
Get rid of credit card debt, and then maybe your credit cards
The average interest rates for credit cards is about 17%. The more you owe, the more you’ll have to pay, and it can take years to get out of debt if you only make minimum payments. If you have debt on multiple cards, a common strategy is to get rid of your highest interest rate debt first, and then pay off the next highest rate after that. You’ll be saving yourself money by getting rid of the high-interest debt first.
Then consider getting rid of your credit cards. Think long and hard before charging items rather than paying with your debit card. If you’ve got a high-interest credit card, that $25 impulse buy could cost you a lot more in the long run.
Buy life insurance
Life insurance can help protect your loved ones against loss of income and other financial uncertainties in the event of your death. In fact, purchasing life insurance can be an essential part of a smart financial plan, according to some experts, which should also include regular saving and investing. In fact, the younger you are when you buy life insurance, the cheaper it’s likely to be.
Fund your retirement accounts
Whether it’s a 401(k), Roth or Traditional IRA, you should consider making regular contributions to your retirement accounts, from each paycheck. The sooner you start saving for retirement, the more you can benefit from something called compounding, which is essentially earning money on your earnings, or interest on your interest.
Disconnect your online shopping apps
It’s too easy to spend money using your phone. Get rid of temptation by eliminating the apps so you’re not tempted to make impulse purchases.
Save your pennies
Keep your change in a jar, and bring it to the bank at the end of each month. And not just coins, throw in singles and fives too. You might be surprised how saving even these small amounts can add up over time.
Sticking to your budget
- Sticking to a budget is something to be proud of
- You can budget for long or short-term goals
- Stash can help you budget for all the things you want to do in life
First of all, congratulate yourself for setting up a budget. You’ve taken a step toward financial stability with your money blueprint.
Now you have to stick to it. Sometimes it’s going to be tough. You’ll want that $200 pair of sneakers, or you’ll be tempted to splurge on a well-deserved vacation, or even a night out.
The more you stick to your budget, the more you can achieve all your financial goals. That might mean saving money for a house, for your children’s education, and eventually for your own retirement.
If impulse spending that makes you veer from your budget is a real problem, try the wait it out method. That means waiting 30 minutes or longer before making that purchase. It could also mean using your budget to set up a splurge fund to buy something you want if you don’t have money for that purchase right away.
You don’t have to go it alone, either. There are tons of apps—including Stash—that help you keep to a budget by monitoring your spending and sending you alerts if you’re on track, or in danger of veering off course.
Make your budget your friend. It can help orient you and your financial life. And it will be there when you need it to be.
Which of the following reflects the ideal relationship between your income and expenses?
Your income is greater than your expenses. When you design a budget, you want to make sure that your expenses don’t exceed your income. You never want your expenses to exceed your income. Ideally, you want enough of your income left over each month so you can save, and eventually invest.
Which of the following statements regarding gross and net income is FALSE?
Your gross income should be used when calculating your budget. When it comes to your budget, you’ll want to use your net income rather than your gross income. Why? Your gross income represents the amount you make before any deductions. Since your paycheck is subject to withholdings, such as taxes, social security, and Medicare, this amount does not represent your take-home pay.
What does the 50-30-20 budget suggest in terms of allocating your income?
50% to fixed expenses, 30% to flexible expenses, 20% to savings. This is the suggested amount. However, there is no one-size-fits-all budget! A budget is as unique as you are, and you can come up with your own numbers.
Which of the following is an example of a fixed expense?
Rent. Fixed expenses are expenses you have to pay every month no matter what and they don’t change very much over time. Variable expenses include purchases you have control over, such as clothing, groceries, and entertainment. Unlike fixed expenses, variable expenses will likely change over time.
Which of the following is not a recommended use for an emergency fund:
Vacation. An emergency fund is money you set aside for unexpected life events, that sudden car repair, medical expense, or layoff. In general, it is recommended that you reserve this fund for these purposes, rather than using it to pay for your vacation (you can allocate that to your variable expenses).
If you have credit card debt, you might consider starting by...
Paying off the card with the highest interest rate. If you have debt on multiple cards, a common strategy is to get rid of your highest interest rate debt first, and then pay off the next highest rate after that. You’ll be saving yourself money by getting rid of the high-interest debt first.