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With more and more Americans using online banking or mobile banking apps to see their bank account balances anywhere at any time, you’d think the average household would be saving more and having a better grasp on their finances. However, online banking and mobile apps are no substitute for creating a monthly financial plan, or a budget, to allocate spending, set aside savings, and pay off debt. A budget helps households and individuals reel in spending by tracking income and expenses, and helps households and individuals plan for the short- and long-term. It can also help households stop incurring new debt and begin to pay off outstanding debts. Any individual or household in any financial situation can benefit from creating and keeping a budget, which only takes a few hours each month to manage but can have a lasting effect on financial health.

Spending in the United States

According to a 2013 Gallup poll, only one in three households in the United States prepares a budget each month and tracks income and expenses. It’s no wonder then that so many households go into debt by using credit cards to pay for both essential needs like the electric bill and “wants” like shoes or concert tickets.

Oftentimes when people cannot pay for goods in cash and use credit it is because of a lack of savings. The graph below shows how as personal savings have decreased, credit card debt has increased, as a percent of a person’s disposable income (or after-tax income) :

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When consumers use credit cards and rack up debt, their debt accumulates interest, increasing the overall amount of money they owe (which we cover in greater detail in our Guide to Credit Management ). This makes it that much more difficult to pay off debt and gain control of finances.

Why Create a Budget?

How can households avoid incurring more debt, and begin to start paying off what they already have? The simplest and best answer is to reel in spending. It sounds easy, but for the vast majority of Americans, it is not. According to the Bureau of Labor Statistics’ 2012 Consumer Expenditure Survey:

  • The average household spent $51,442.

  • However, the average household earned $65,596 before taxes.

  • With effective tax rates averaging somewhere between 20-30% of income, the average household earned $46,000-53,000 after taxes.

The bottom line: most households were spending more – in some cases much more – than they actually earned.

In the next sections, we’ll show you how to create a budget – your household’s financial plan – to get in control of your finances. We’ll break down the steps to set your budget, show you some sample budgets for different life situations, and give some helpful tips on how to stick to your budget.


Creating a Personal Budget

You’ve been told time and time again that you need to create a budget. Why?

A budget is a financial plan based on your income, expenses, and financial goals. It can help you take control of your finances and limit surprises. By breaking down spending across various categories, tracking spending in those categories, and adjusting your spending habits based on your budgeting goals, you can rein in spending, save money for the short and long-term, get out of debt, and achieve overall better financial health.

Building a Budget


Analyze Your Income

The first step of creating a personal budget is figuring out how much money you make per month.

      • First, determine your gross income . This includes all money earned before taxes, such as from your paycheck, freelance work, or any part-time work, including side jobs or moonlighting gigs (such as piano lessons, dog walking, babysitting, selling goods online, etc.).

      • Now you’ll need to find your net income. This is what you really earn. Net income is also called disposable income, and it is your earnings after taxes and any deductions, like for social security or a 401(k).

Determining net income can be complicated. If you filled out a W-2 for a salaried or hourly job, taxes and deductions should be withheld every pay period. Double-check your pay stub. If they are being withheld, the money you receive every pay period is your take-home pay for that job. Add up take-home pay on all W-2 paychecks. If your only sources of income are W-2 jobs, you now know your monthly net income.

If you are self-employed, a contractor, or receive other income without withholding, you have some more work to do. For contractors and freelancers who receive 1099 tax forms, or anyone who earns income for goods or services rendered (yoga instructors, people who sell trinkets online, etc.), check with a tax professional to help determine your monthly withholding.

Other sources of income that need to be factored in include:

      • Any money received from pensions or social security

      • Child support and alimony

      • Dividends, interest, and capital gains

      • Rental income

      • Royalties

Once you’ve determined withholding on any of these income sources, subtract the withholding from your gross income.

Add net income from these sources to any take-home pay from a W-2 paycheck. This is your total net income.


      • This Paycheck Calculator can help you determine your net income. Simply select your state to account for state income tax and fill in the blanks.

      • For the current self-employment tax rate and other information, see the IRS website.

Breaking Down Your Spending

So you’ve figured out how much you really earn every month. Now, it’s time to see where your money goes.

(As a side note, the budget creation tools suggested in the “Budgeting Tools” section below offer fast, easy, and accurate ways to begin categorizing expenses and adding up spending in each category. Some tools even link to online bank and credit card accounts and will automatically categorize and analyze expenses for you, saving you a lot of time and effort combing through past statements and manually keeping tracks of spending going forward.)

      1. Gather bank and credit card statements from the past few months to get a better idea of what your current monthly spending habits are.

      1. Categorize expenses and purchases. Some basic categories are:

      • Groceries

      • Housing: rent or mortgage

      • Rainy day fund

      • Clothing

      • Entertainment: movies, sporting events, books, DVDs

      • Monthly bills: phone, cable, internet, utilities, gym membership

      • Insurance: auto, home, health, dental

      • Debt payments: credit cards, student loans, medical bills, car payments

      • Child care

      • Dining out

      • Home furnishings

      • Transportation: gas, bus fare, parking

      • Subscriptions: newspaper, magazines, Netflix

      • Pets

      • Charitable giving

The list goes on, depending on your household’s monthly needs and spending habits.

      1. Organize expenses into two main categories: fixed and variable expenses. Fixed expenses are the set expenses your household pays every month. These expenses stay the same each month, like your rent, mortgage, car payments, or internet bill. Variable expenses are those that may change from month to month. Gas, groceries, heat, and entertainment are all variable costs that may fluctuate based on the time of year or any number of circumstances.

      1. You may want to split your spending into two final categories: needs and wants. Both fixed and variable expenses may end up in either grouping. Needs include rent, insurance premium payments, child care, and anything else that is necessary for the well-being of you and the individuals in your household. Everything else belongs in the want category (though that doesn’t automatically mean you can, should, or need to live without them).


      • Rent

      • Groceries

      • Health Insurance Premium

      • Gas

      • Daycare

      • Telephone bill



      • Clothes and shoes

      • Dining out

      • Cable television bill

      • Movie tickets

      • Toys

      • Cell phone upgrade

Starting to Save

You know how much you earn and how much you spend. By categorizing your expenses, you have a better idea of what you need for the short-term – but what about in the long run?

Part of the purpose of budgeting is to make an attainable savings plan to help prepare for future expenses (expected and unexpected), chip away at debt, and reach your financial goals.

In our Savings Options section , we go through the different kinds of saving options out there and how interest works. Later, we’ll talk more about income allocation  and some rules of thumb for how much you should try to save of what you earn. For now, identify what you want to save for. Some examples include:

      • Rainy day fund – money you put away to be financially ready in case of emergency or unexpected expenses

      • Pay off credit cards, student loans, medical bills, and other debt

      • Retirement

      • New car

      • A house

      • Education – college savings for you and/or your children

      • Vacation and travel

Budgeting Tools

After determining net income, establishing where your income goes, how much of it is spent on different categories each month, and identifying how much you want to save and for what purpose, you’re now ready to create a monthly personal budget and track your earnings, spending, and saving. There are several ways to go about this, but all involve planning based on what you earn, what you spend, and what you want to save.

  • Worksheets: There are many downloadable worksheets available, such as this one from, to help you create your personal budget. These worksheets include general categories applicable to most households. Simply fill in the blanks each month to see if you’re reaching your budget goals.
  • Spreadsheets: For Excel wizards and newbies alike, spreadsheets offer another way to create categories and track spending within them. Microsoft has several Excel templates for budgets here, and many users have created and shared their own. Search around to find one that works for you. Once you’ve picked your template, input each and every expense by category. Pick an hour a week to tally receipts and statements so you can see your spending as you go.
  • Budgeting Software: The easiest and fastest way to create and manage a budget is to use budgeting software. There are many programs available to set a budget and track spending. Many give you the option to link to your bank and credit card accounts to automatically add and categorize expenses as they occur, letting you know when you’re close to reaching your budget for a given month, and allowing you to view charts and graphs of your spending over time. Some work on your tablet or smartphone so you can view your budget and add expenses anywhere at any time. Here are just a few examples of the many options available today.
    • Mint: Mint is a popular smartphone app and internet tool that links to your accounts. After linking Mint, it gives you an idea of how much you spend per month and on what, allowing you to make smart, realistic budget goals based on your current spending. Mint will also send alerts when you’re near or over budget. Best of all, it’s completely free.
    • Quicken: Quicken has long been one of the more popular electronic budgeting tools out there. You may link Quicken to your bank and credit card accounts or input data manually for tracking. Quicken works in conjunction with maker Intuit’s other software, which includes popular tax software TurboTax, allowing for easy preparation at tax time.
    • Other similar tools include BudgetTracker, BudgetPulse, Buxfer, and Mvelopes.


  • US News and World Report’s 8 Steps to Creating a Personal Budget.
  • CNN Money’s Money 101 is “a step-by-step guide to gaining control of your financial life” and covers everything from creating a budget to saving for college.

Savings Options

There are several different places the money you save can go. Below, we’ll detail some of them and discuss the pros and cons of each.


But first, why put your money in an account of any kind in the first place? The simple answer is to earn interest. Interest is a fee paid by a borrower of assets as a form of compensation for the use of assets. In a common example, it’s what a bank pays someone for depositing money in an account with that bank. When you put money in a bank account, you’re letting the bank borrow that money to loan out to other people and make more money. The bank pays for the right to loan out your money based on how much money you deposit, and this is called interest.

When your money is in a bank account and accumulates interest, it grows little by little, just by sitting there, and keeps growing. As the initial money you put in the account (called the principal) earns interest, the gains from interest also earn interest. This is called compound interest.

For example, say you deposit $1000 into a savings account with 10% interest. At the end of the first year, you will have $1100 in that account, gaining $100 on the principal. Now, that earned interest added to the principal also grows at 10% interest, so at the end of the second year, you now have $1210, just off that initial $1000. After 20 years, the initial $1000 has grown to be worth $6,727.50.


Types of Savings Options

Checking Account

A checking account is used for the majority of transactions. Money deposited in a checking account can be withdrawn to pay bills and make everyday purchases. Checking accounts offer the most flexibility in how money is withdrawn, through:

  • Debit cards transactions

  • ATM cash withdrawals

  • Writing personal checks

They also offer the most flexibility for how often transactions can be made.

Conversely, users pay for this flexibility with low or no interest on their money. This account is meant for money moving in and out, not so much for saving.


  • Usually few restrictions on number of withdrawals per month

  • Easy to withdraw money through debit/ATM cards or personal checks


  • Offers low or no interest on money deposited

  • Not ideal for savings

Typical Interest Rate: 0.01 – 0.05%

Regular Savings Account

As the name implies, a savings account  is meant for money that will enter the account and not leave it as frequently as in a checking account. As a result, savings offer higher interest rates than checking accounts but may make it somewhat harder to withdraw money by limiting the number of withdrawals per month. A regular savings account is the middle option between a checking account and a certificate of deposit (CD).


  • Higher interest rates than checking accounts

  • Able to make infrequent withdrawals, typically 6 or less per month

  • Lower minimum requirements to open an account than a CD or money market account


  • Lower interest rate than a CD

  • May have limits on number of withdrawals per month

  • May have account minimums that must be met or a fee will be charged

  • Interest rates typically are not fixed, or fluctuate based on the market

Typical Interest Rate: 0.06 – 0.14%


Certificate of Deposit (CD)

For money your household can reasonably put away for months or years at a time, a certificate of deposit or CD may be the best place to save that money. CDs are offered by many banks and credit unions and come with pre-specified terms. When you deposit money into a CD, you agree not to withdraw that money for 3 months, a year, 5 years, or longer, based on the terms of the CD. In exchange, the interest rates are much higher than those of a savings account. Additionally, interest rates for a traditional CD are fixed, so you know how much you’ll get when the CD has matured (the terms are over). In general, the longer the terms, the higher the rate. Any funds withdrawn early are often greatly penalized to discourage early withdrawals. There are several different kinds of CDs, including some with low or no penalties for early withdrawal, as detailed here.


  • Higher interest rates

  • Interest rates are often fixed, or do not fluctuate

  • A safe investment – if the interest rate is determined ahead of time, you’re guaranteed to get back what you paid plus interest


  • Typically, cannot withdraw funds early without a steep penalty

Typical Interest Rate: 1 year CD, 0.88%; 5 year CD, 1.66%


  • Calculate potential earnings on a certificate of deposit with this CD calculator.

Money Market Savings Accounts


Money market accounts are very similar to regular savings accounts. The big difference? They offer higher interest rates. However, many require higher initial deposits than savings accounts – so where you might be able to open a savings account with $100, the minimum for a money market account may be $10,000.


  • High interest rates

  • Able to make infrequent withdrawals, typically 4-6 per month

  • Some money market accounts may allow for check writing privileges


  • Large minimum deposit requirements

  • Limited number of withdrawals

Typical Interest Rate: 0.8 – 0.11%

Managing Cash Flow

One thing a budget does not take into consideration is when you earn money and when you need to spend money on bills, rent, and other payments with a regular deadline.

Cash flow is the movement of money in and out of your bank account. Positive cash flow is when the balance increases. Conversely, cash flow is negative when the balance decreases.

Cash flow is a term often used when talking about businesses, but it’s just as essential for personal finances. When businesses mismanage their cash flow, they have to borrow money to stay in business or risk closing up shop, or filing for bankruptcy; personal finances are very similar.

When a household is waiting on income but the mortgage and bills are due, they have to borrow money to “stay in business.” These loans are costly (especially payday loans, which can carry interest as high as 500%), add to a household’s debt, and make it that much harder to save money and attain financial goals. Additionally, accidentally overdrawing accounts can lead to costly overage charges.

Therefore, it’s essential to also manage cash flow alongside spending by taking these steps:

  1. Look at your sources of income and see which are regular, or are earned on a predictable schedule with the value known in advance. A salary or paycheck is a regular source of income.

  2. Next, look at your regular expenses – for instance, rent, a mortgage, car payments, or tuition.

  3. Take into account irregular expenses like gas and groceries, whose prices fluctuate and are bought on a more or less irregular basis.

  4. Lastly, it’s time to create a cash flow management system. There are several recommended methods detailed in this article by the Department of Health and Human Services’ Assets for Independence Resource Center. Use whichever works best with your current budgeting methods.

Cash Flow Management Systems

  • The calendar method (seen here) gives users a visual reminder of what is due when. Use an empty calendar to note income and expenses and track cash flow.

  • If you already use a spreadsheet for budgeting, you can enter calendar dates alongside income and expenses.

  • For those who use smartphone apps or other software tools, it’s very easy to manage cash flow by setting up alerts for when bills are due or when paychecks have been deposited. Anyone who does online banking can also set up alerts for low account balances through their bank’s website or smartphone app.

Avoiding Cash Flow Pitfalls

  • Some electronic transfers, such as direct deposit paychecks (regular income) or automatic payment withdrawals, such as for car insurance (regular expenses), may take anywhere from 1 to 7 days before they clear. Confirm with your banking institution the length of time for money to appear in your account.

  • Sometimes a monthly cash flow plan isn’t good enough – there may be income or expenses that occur bimonthly, quarterly, or annually, such as tuition payments or car tabs. Budget each month to save enough for these expenses so the cash will be available and expected when due.

  • Unexpected expenses can really disrupt cash flow. Be ready for when the household car breaks down by putting aside money each month in a rainy day fund. Having cash savings on hand is truly the best way to absorb these unexpected expenses and avoid money management problems and incurring debt. For recommendations on how much to keep in your rainy day fund, see our section on Income Allocation .

  • Don’t count on irregular income or windfalls, such as bonuses or tax refunds. These are dollar values you can’t 100% be sure of in advance. Budget according to regular income, and treat any windfall money as bonus money to stash away in your rainy day fund.


Income Allocation

How much should you be spending, and how much should you be saving? The answer depends from individual to individual, household to household, but there are some general rules of thumb we’ll detail below. We’ll also give some standard advice for people at various stages of life.

The 50/20/30 Rule

There’s no one-size-fits-all budget – budget needs truly vary from household to household – but a good, simple foundation for any income allocation plan is the 50/20/30 rule.

In essence, the 50/20/30 rule breaks down what percent of your net income, or after-tax take-home pay, goes to essential expenses, financial health, and lifestyle choices.

  • 50% of net income: essential expenses. These are your must-haves, the basic expenditures that are necessary for daily life. This includes:

    • Housing costs

    • Gas

    • Groceries

    • Insurance

    • Utilities

    • Tuition

    • Minimum loan payments

Other contractually obligated payments should go into this category as well, such as:

  • Your cell phone bill

  • Child support payments

Your must-haves cover a lot of expenditures, and it may take some work to whittle down this category to 50% or less of your net income.

  • 20% of net income: financial health. This includes:

    • Savings

    • Debt repayments above the minimum monthly requirement.

Aim to put away 20% of net income into: a

  • Rainy day fund

  • Retirement savings

  • Pay off credit cards, student loans, or other debt

Putting 20% of income towards these goals will help achieve greater financial health.

  • 30% of net income: lifestyle choices, or your wants. Wants are expenses for:

    • Entertainment

    • Clothing

    • Dining out

    • Anything you could save for another time or, if in dire straits, live without

The 50/20/30 rule prioritizes spending as well.

  1. First, take care of essentials

  2. Then, contribute to long-term financial health

  3. And finally, if there is still money left over, treat yourself to a meal out or get the new pair of shoes you’ve been eyeing

It may take months of readjusting spending to achieve something close to the 50/20/30 balance, but the closer you get, the greater financial health and flexibility you will have.


Income Allocation Plans for Different Stages of Life

Of course, the 50/20/30 rule is a basic rule of thumb for allocating income in an effective budget. A person or household’s budgeting needs change over time as incomes, expenditures, and circumstances change with them. Here are some basic income allocation strategies for people at different stages of life.

Kids and Teens Under 18

For kids and teens, just getting in the habit of setting a budget and sticking to it is a huge first step toward a lifetime of financial health.

Kids and teens generally have low incomes, either receiving allowances or working part-time, but also low essential expenditures. Now is a great time to start saving for college, a car, or to create a strong savings base.

  • Essentials: 20% for gas, extracurricular club dues, college application fees, etc.

  • Savings: 50% for savings toward college tuition, rainy day fund, a car, senior trip, sports camp, etc.

  • Spending Money: 30% for movies, eating out, clothes, etc.


College Students

Many college students are living on their own for the first time, making the creation of a budget all the more important. A college student’s budgetary needs can vary widely, depending on financial aid received, parental assistance, and a variety of other factors.

In general, we’ll assume the student is working part-time, lives in an on-campus dormitory, is on a meal plan, and has a student loan.

  • Essentials: 35% for text books, transportation, student fees, etc.

  • Savings: 35% for saving toward postgraduate student loan payments. For college students on a limited income, it can be difficult to save. Anything that can be saved toward future loan payments can be a huge help later on.

  • Spending Money: 30% for going out with friends, pizza, on-campus activities, clothes, etc.


  • The U.S. Department of Education’s Office of Federal Student Aid has numerous resources for those seeking help paying for college.

  • Confused about how to pay for college, and what loans will mean for your financial future? Check out this infographic from the Federal Reserve Bank of St. Louis for a better idea of the types of government aid available, loan payment amounts, and more.

  • The FDIC offers this guide geared to college students and young adults on Taking Control of Your Finances.

Married Couples

Married couples in a two-income household face tough budgetary choices when it comes to savings vs. essentials, especially if they have children. A balance must be found between saving for retirement and a child’s education, while still building up reserves in a rainy day fund and managing short-term expenditures.

  • Essentials: 55% for housing, utilities, groceries, transportation, child care, minimum loan payments, etc.

  • Savings: 20% for general savings, rainy day fund, paying off debt, retirement, college education fund, etc.

  • Spending: 25% for clothes, kids’ classes and sports, vacations, home furnishings, pets, etc.



Retirees have done the saving required to retire, and have already paid for major life purchases such as a home or a child’s college education. However, it is still important to budget while on the fixed income of a pension or social security, or living off of retirement savings.

  • Essentials: 60% for transportation, medical bills, prescriptions, groceries, etc.

  • Savings: 5% for a rainy day fund, vacation savings, contributions to grandchild’s education fund, etc.

  • Spending: 35% for travel, entertainment, etc.


Tips for Successful Budgeting

The best budget on paper means nothing if a household does not make an effort to stick to it in the real world. Many factors can sabotage the best laid plans. Here are some tips on constructing a realistic budget that actually works.

  • Above all, be realistic in your budget. Set yourself up for success by crafting a budget that realistically reflects your income, expenditures, and the amount you can save each month.
  • Keep it simple. Choose large, general categories, and use round numbers for your budget numbers.
  • Don’t strip it to the essentials. Allow yourself some pleasure spending, and don’t feel bad when you do. If it’s in the budget, it’s okay. Just like with dieting, if you don’t allow yourself some leeway every once in a while, you’ll eventually ditch the plan completely.
  • Pick one expenditure category at a time and work on it. If you identify an area where you can spend less, focus on cutting down just that expenditure.
  • When cutting back, do it gradually. If you buy a donut every morning on the way to work and want to decrease that spending, start limiting your morning splurge to 3 days a week, and then eventually to 1.
  • Budget in a cushion. Dedicate a small portion of your budget – under 10% – as a kind of short-term emergency fund. That way, if you go over budget in a given month on a certain category it won’t wreck your whole budget. Any portion of the cushion that you don’t spend goes to savings.
  • Revise your monthly budget from time to time. Don’t be afraid to adjust your allocations – make your budget a realistic reflection of your spending, and what you can spend less on.
  • Try a few budgeting methods, such as those detailed in “Budgeting Tools,” and stick with the one that works best for you.
  • Set aside an hour a week to input income and expenditures and review your budget status, rather than constantly managing your budget. Create a place to set aside receipts and pay stubs for your weekly budgeting update.

Additional Resources


20somethingfinance: author G.E. Miller covers all the steps for 20-somethings to get “financial independence ASAP.”

The 20-Something Budget: the author chronicles financial life as a 20-something, with helpful tips on paying off debt, frugally renting, and staying afloat while unemployed (and she shares a lot of her favorite recipes too).

Budgets Are Sexy: J. Money, the mohawked “Miley Cyrus of Finance,” puts his own spin on solid budgeting strategies.

Get Rich Slowly: A renowned blog on how to build wealth from a founding author (who now has a whole staff of writers) who overcame being $35,000 in debt himself.

Our Freaking Budget: Joanna and Johnny, a young couple with a newborn, detail their financial life and getting out of debt. They dedicate a good portion of their posts to their “freaking” budget.

Wise Bread: The tagline says it all – “living large on a small budget.”

Your Money: The New York Times talks all things financial, including budgets, on their Your Money blog.


The Budget Kit: The Common Cents Money Management Workbook by Judy Lawrence is a bestselling guide to budget creation, now in its 5th edition.

How to Manage Your Money When You Don’t Have Any by Erik Wecks is a no-nonsense, realistic guide to budgeting and finance for those who struggle to make ends meet.

The One Week Budget: Learn to Create Your Money Management System in 7 Days or Less! by Tiffany Aliche helps readers examine their spending and teaches how to do more with less.

The Total Money Makeover: A Proven Plan for Financial Fitness by Dave Ramsey is a New York Times bestseller and personal budgeting classic.


Google Docs Templates: Google Docs offers free downloadable templates for managing expenses, paying off debt, and growing savings.

You Need A Budget: A comprehensive budgeting method including budgeting software, articles, and free online classes.

Websites: Finance Guide: a guide to creating and managing a family spending plan for military families during deployments. Includes advice on how to save and avoid taking out payday loans.

Money Under 30: claiming to be the world’s most comprehensive website focused on finances for 20- and 30-somethings, Money Under 30 has numerous resources and articles on banking and budgeting.

Smart Military Money: a part of the Veterans United Network, this website has budgeting and finance advice geared for active military personnel and veterans.