What Is a Budget? Definition and Tips

A budget is a tool for managing your income, expenses and other financial goals like savings and debt payments. Budgets usually cover a set period of time, such as a month or year.

Budgeting can involve making a list of expenses or just focusing on a few categories — like grocery spending or shopping. Some people prefer to write their budget out by hand, while others use a spreadsheet or budget app.

When it comes to budgeting, there’s no single "right way." What works for one person might not work for another for a variety of reasons, such as family size, geographic location or financial priorities. The key to budgeting is finding a method that fits your style and sticking to it.

How to make your own budget

1. Figure out your take-home pay (income after taxes and deductions like healthcare premiums and retirement savings). 

2. Track your expenses for a month. Keep track of everything you buy and categorize it into needs, wants and savings/debt. 

3. Choose a budgeting method. There are tons of great options, but the 50/30/20 is a great place to start (more on that below). 

4. Compare your spending to your method’s suggested categories. If your “wants” exceed 30% of your budget, for example, then shift money and priorities to meet your goals next month. 

5. Review your budget regularly. Taking a look at your spending and seeing how it’s stacking up to your budgeting categories weekly can help you correct your behavior if you’re not meeting your goals. Monthly reviews help you see what’s working and what’s not and make changes for the next month.

What is a good budget?

When it comes to picking a budgeting method, the 50/30/20 budget is one solid option. Your after-tax income is divided into three categories:

• 50% for needs: things you must pay for, necessities, such as housing, transportation, utilities, loan payments and groceries.; 

• 30% for wants: things you choose to spend money on,, including travel, entertainment and dining out. 

• 20% for savings and debt paydown: money set aside for emergency funds, retirement and paying off extra debt paying off debt beyond the minimum payments.

If that 50/30/20 breakdown isn’t feasible for you, consider the 60/30/10 budget or other types of budgets that may better fit your goals and challenges, such as zero-based budgeting.

Why is budgeting important?

Budgeting encourages you to put your money to work in the best way possible and can help you identify overspending. Think of a budget as a next step toward reaching your financial goals. It can help you:

See where your money is going

Budgets show your income and how much you're spending in various areas of your life. Tracking expenses can help you spot patterns in your spending. From there, you can identify where to make adjustments, if needed.

For example, maybe your budget shows that you spend less than you earn, but you’re paying for subscriptions or services you no longer need. Cutting those "wants" can free up money so you can more easily meet monthly needs.

Plan for upcoming expenses

Budgets can also help you plan for how you’ll cover upcoming expenses, including rent, car payments or holiday spending. Mapping out expenses in advance can help reduce the risk of overspending.

Save for the future

A good budget encourages you to set aside money for an emergency fund and savings goals, like a vacation or retirement. Budgets can also help you plan for larger purchases, like saving money every month for a car or a downpayment on a house.

Treating your savings goals like bills within your budget can make larger goals more reachable. Savings buckets, or sinking funds can help you manage your savings. For example, you could put $100 into a vacation fund, $50 into a holiday gift fund and $250 into an emergency fund.

“Start small and start now,” Dasha Kennedy, author and financial influencer, said in an interview. “I don’t care if it’s $10 a week. Consistency matters more than the amount.”

» Ready for a financial glow up? Here are Dasha Kennedy’s tips for living well within your means.

Get out of debt

Budgets can help you see how much of your money you can safely put toward debt repayment. It can also help you prioritize different types of debts.

Setting aside money regularly can help you build a financial cushion. That way, when unexpected expenses come up, you may be able to cover them without relying as much on credit cards. Over time, this can help you limit or avoid high-interest debt.

Relieve stress

Budgeting can help you feel more prepared for the challenges life brings. Knowing exactly where your money is going can bring a sense of relief. Having a clear picture of your finances can help reduce the stress of uncertainty, and make it easier to plan. 

A good budget can help you get through seasons where spending is higher — like around the holidays or during the summer, when travel is at a premium — with smart planning and preparation.

You might feel better and more secure knowing you are building a financial safety net and are actively saving for your goals and dreams. A budget is there to make you feel empowered and in charge of your money and your life.