At Stash, we believe the first step to taking control of your finances is having a clear picture of how much money you have coming in as income, and what you have going out as expenses each month.

The goal is to spend less than you earn, so you can save and plan with the money you have left over.

Once you have these numbers firmly in your mind, they can become the cornerstones for your entire financial life and plan. Knowing how much you have and how much you spend are essential to coming up with short-term plans like building an emergency fund, but also for long-term objectives such as buying a house or setting money aside for retirement. 

These numbers can also help you plan for the near term, simply by letting you know how much you have to spend on everything from food and clothes to shelter and entertainment during the month. 

Knowing what your life really costs probably requires going through your bank statements, receipts, and credit card bills and tallying up everything you spend money on during the month, and throughout the year.  

But we don’t want you to get overwhelmed by this task. We’re going to start with a simple worksheet to help you figure this out.  If you don’t know, just take an educated guess, because you are better off guessing than quitting, and never taking full stock of what you have.

Fixed or variable expenses? 

To start we are going to help you organize your money into three categories; income, fixed expenses, and variable expenses.

You can jot down your income on a piece of paper, in a spreadsheet, or wherever 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 actually 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. 

Now, take your total income and subtract your total expenses and cross your fingers that you end up with a positive number.  If you have a negative number, meaning you spend more than you earn, don’t freak out! We’ll help you figure out how to make it positive by setting up a budget.

If you have a positive number, meaning you spend less than you earn, it’s time to celebrate because you are already ahead of the game! You are making more than you are spending and this is essential to growing wealth. You are ready to start saving and investing.  

But first, let’s review how you can save more money by using a simple budget. 

Why you may need a budget

Every journey starts with a first step. And many journeys also require a map, so you know where you’re going. In the world of personal finance, both your first step and your map are called a budget. 

A budget lays out your path for spending less than you earn, and achieving your long-term goals, whether that’s buying a new car, paying for your child’s education, saving for retirement, or doing something fun, like going on vacation.

But people seem to dread the word budget, because they think it implies limits and an end to freedom and fun. In fact, a budget is just the opposite. You can think of your budget as your financial declaration of independence.  It’s a living, breathing thing that changes with you, your needs, and your life, and it can help you apply order and purpose to your finances.

With a budget, you gain understanding of how much money you have coming in each month, and how much you’re spending, and on what. Not only that, you can use your budget to put money aside, for the things you have to spend money on each month, as well as what you want to spend money on. Yes, you have to pay your rent and your mortgage and your student loans, but every budget should have room for fun things, and for your dreams, whether that’s saving for a new car, a vacation, or your first home.

The point of any budget, is to make sure you’re not spending more than you earn. And you need to get a handle on what you spend, because probably the most important financial goal for everyone when they start planning their financial lives is saving. 

Savings allow you to weather the various uncertainties that life can hand us. Savings can also help you achieve both short-term and long-term goals. It also factors into how much you have to invest, which can help you build wealth in the long run.  

What type of budget is best for you?

There are numerous types of budget you can try, or you can feel free to create your own.. One of the most popular budgeting techniques is something called the 50-30-20 budget

Here’s how it works. 

  • Determine what your take-home pay is each month; this is the amount that you have after taxes. (It’s also called “net pay.”)
  • List your fixed expenses and variable expenses.
  • Allocate 50% of your take-home pay to fixed expenses.
  • Aim to spend no more than 30% of your pay on variable expenses.
  • Save at least 20% of your take-home pay.

But that’s just one budget, and you can feel free to adjust the percentages to whatever’s comfortable for you, as long as you make sure you’re saving money each month. There’s also something called the envelope method, and something called the zero-sum budget. You can learn more about those here and here. The important thing is that you choose some form of budget, so you can carefully examine your monthly spending, and put money into savings each month.

Stash actually has a number of financial planning tools that can help you start to build a budget. One of these is called partitions, which can help you segment your savings into different categories, including your fixed and variable expenses, as well as your savings. 

Pay your bills on time

The average U.S. household pays 13 bills each month, and yet 43% of consumers report that paying bills is either somewhat or very difficult, according to the Consumer Financial Protection Bureau (CFPB). 

Paying your bills on time can go hand-in-hand with building a budget. Make sure you include all your bills as part of your monthly fixed and variable expenses so that you’ll pay them on time each month and not get behind on payments.

Staying on top of your bills can insure that you’re not eating up your monthly income paying late fees.

Prompt payment of bills can also help you maintain a good credit score, which measures how well you manage your debt. Having a strong credit score is necessary for certain financial milestones such as buying a car, taking out a mortgage for a home, even renting an apartment. So, it’s important to pay all of your bills—including credit card, utility bills, and student loan payments—on time and in full.

Welcome to your new financial home.

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