early 30s women pausing from paying bills and discussing the budget to hug and kiss their 8 year old child.

Money Tips & Education

What is a personal budget and how can it help you?

Nov 01, 2023

Rebecca-Lake.jpg

Written by

James-Heflin.jpg

Reviewed by

Key takeaways:

  1. A budget is a plan for how you spend your money each month.

  2. Making a budget can help you control your money, instead of your money controlling you.

  3. Budgeting apps can make tracking your expenses easier. 

Do you ever feel like money is a big mystery? Sure, you know how to make it and spend it. But does building savings, or even building long-term wealth, feel out of reach? 

Mastering your money means striking a satisfying balance between what goes in each month and what goes out so that you can get ahead. That's where a budget comes in. A budget isn't anything fancy—it's just your plan for how you'll spend your money.

What is a personal budget?

A personal budget is a plan for putting your money to work. You get to tell your money where to go and what to do. You might find a free budgeting app helpful as you get underway. 

Budgeting basics

A budget tracks how your cash flows each month. On one side, you have the money that comes in. On the other, you have the money that goes out.

Here's a closer look at how the two sides of a budget work.

Income sources

Income in a budget is any money you receive. So what counts as income for budgeting?

Examples of income include:

  • Regular paychecks from a job

  • Bonuses or commissions

  • Money from part-time jobs or side hustles

  • Self-employment income if you run a business

  • Spousal or child support you receive

  • Government benefits

  • Investment income

Some income sources are regular, meaning you can predict when you'll get paid and how much. A 9-to-5 job that pays you every other Friday is an example of regular income.

Irregular income is money that doesn't always show up at the same time or in the same amount. If you drive for a meal delivery service in addition to your day job, for instance, you might earn an extra $300 one month and $500 the next.

The most important thing to know about budgeting income is that you want to use your take-home pay when you make your choices. This is the money that goes into your bank account after taxes and other deductions get taken out. This is also called your net pay.

Knowing how your income relates to your expenses will help you reach money goals. For instance, when you want a mortgage, the lender will look closely at your debt-to-income ratio (DTI) to make sure you can afford your payments. Your DTI is the percentage of your income that goes to debt payments.

Fixed vs. variable expenses

Expenses are the other part of a budget. These are your outgoing cash flows—everything you spend money on. 

Fixed expenses are the same every month. Examples of fixed expenses include:

  • Rent or mortgage 

  • Car loan

  • Insurance premiums

  • Subscription services

  • Internet and cell phone service

  • Installment loan payments

Variable expenses are expenses that can fluctuate from month to month:

  • Groceries

  • Gas and other transportation costs

  • Utilities

  • Dining out

  • Entertainment

  • Hobbies

  • Clothing

  • Travel

Don't confuse fixed and variable with needs and wants. Some fixed expenses are wants, like your streaming subscription. Some variable expenses are needs, like electricity or groceries.

Types of budgets

A great thing about budgeting is that there are different ways to do it—you can pick a budgeting method that works best for you. Here are some examples of budgeting systems you might try. 

  • Envelope method. With the envelope budgeting method, you label an envelope for each expense. After you decide how much cash you want or need to spend on each expense, you put that amount into the corresponding envelope. Once you spend all the cash in the envelope, you can't spend any more money in that budgeting category until your new budget period begins. 

  • 50-30-20 budgeting. With the 50-30-20 budget rule, you divide your money into buckets. You put 50% of your income to needs, 30% to wants, and the remaining 20% to savings, which includes repaying debt. Having separate bank accounts can help you stay organized.

  • Zero-based budget. A zero-based budget means assigning every single dollar of income to an expense or financial goal. 

  • Reverse budget. The reverse budget has you pay yourself first by putting money into savings from your paychecks before you spend anything at all. This budget system might be a good fit if you've struggled to set money aside before it's all spent. 

You can combine elements of different budgeting approaches. For instance, a zero-based envelope system. 

Even though they work differently, these budget methods have the same goal: to help you stay on top of where your money is going. 

Read more: Tips and tricks to get rid of debt

Leave debt behind, so you can move forward

Get rid of your debt and free up your cash flow without a loan or great credit.

Why is a budget so important?

A budget puts you in charge of your money. You don't have to feel broke all the time, wondering where your money goes, when you have a spending plan. 

Budgeting can help you to set goals and establish financial priorities. For example, say you want to save $1,000 for an emergency fund in the next four months. That works out to setting aside $250 each month. You can tweak your spending and adjust your categories to make room for the fund. To accomplish your goal, you might lower your cell phone plan, cut your clothing budget, or cancel a gym membership that you haven't used lately.  

Budgeting is a chance to change your attitudes and spending habits, and to prioritize the goals you care about most. Having a good plan makes you more aware of what you're spending and more mindful of the choices you make. And those are good things when you're trying to become more financially healthy. 

What's next

We've covered what a budget is, and how having a budget can help you. Now it's time to put what you've learned into action. 

  • Choose a budgeting method to try. When you're new to budgeting, it's helpful to experiment with different methods. 

  • Choose manual or digital. Some people like to make a budget on paper to keep track of income and expenses. Others may prefer to use a spreadsheet program or manage money with a budgeting app. There's no right or wrong answer here. Just pick the option you're most comfortable with. 

If you're leaning toward using a budgeting app, the Achieve MoLO app is one option you might consider. MoLO is a free financial management tool that connects your accounts and tracks your money. It's a simple way to ease into budgeting and feel more in control of your spending. 

  • Give it time. Getting the hang of budgeting may be a big adjustment. Just keep trying. It'll get easier. Even if budgeting seems hard at first, the long-term rewards can be well worth it.

Author Information

Rebecca-Lake.jpg

Written by

Rebecca is a senior contributing writer and debt expert. She's a Certified Educator in Personal Finance and a banking expert for Forbes Advisor. In addition to writing for online publications, Rebecca owns a personal finance website dedicated to teaching women how to take control of their money.

James-Heflin.jpg

Reviewed by

James is a financial editor for Achieve. He has been an editor for The Ascent (The Motley Fool) and was the arts editor at The Valley Advocate newspaper in Western Massachusetts for many years. He holds an MFA from the University of Massachusetts Amherst and an MA from Hollins University. His book Krakatoa Picnic came out in 2017.

Frequently asked questions

If you have irregular income, the best way to budget is to use a base method or an average method. With the base method, you budget only using the amount of irregular income you know you'll receive month to month. With the average method, you budget using the average amount of irregular income you receive per month. 

If you consistently go over budget, it could mean that you're not estimating your expenses accurately or that you’re overspending. Reviewing your spending habits can give you a clue as to what the issue might be. From there, you can find ways to reduce your spending so that you're not exceeding your budget.

The most common budgeting mistake is not making a budget at all. After that, the most common budgeting mistakes include underestimating expenses, forgetting to include all expenses, and not using a budgeting system that’s a good fit for you. 


Related Articles

GettyImages-1383518918.jpg

Money Tips & Education

Some credit checks affect your score, but others don’t, even from the same lender. We’ll explain when and why credit checks can affect your credit.

credit-utilization.jpg

Money Tips & Education

Myth-busting: you don’t need to carry a credit card balance to have good credit! Learn how credit utilization affects credit scores.

how-to-budget.jpg

Money Tips & Education

We’ve got proven plans and helpful tools to help you create and stick with a budget. Learn how in minutes.

Achieve Logomark

Achieve is the leader in digital personal finance, built to help everyday people move forward on the path to a better financial future.

Footer Trust Pilot Marker

TrustScore 4.8/5

Footer BBB Marker

.

Personal loans are available through our affiliate Achieve Personal Loans (NMLS ID #227977), originated by Cross River Bank, a New Jersey State Chartered Commercial Bank, Equal Housing Lender. Loan applications are subject to credit review, underwriting criteria, and approval. Loans are not available in all states and available loan terms/fees may vary by state. Loan amounts range from $5,000 to $50,000. For loans $35,000+ must have a minimum 660 credit score. APRs range from 8.99% to 29.99% and include applicable origination fees that vary from 1.99% to 6.99%. Repayment periods range from 24 to 60 months. Example loan: four-year $20,000 loan with an origination fee of 6.99%, a rate of 15.49%, and corresponding APR of 19.54%, would have an estimated monthly payment of $561.60 and a total cost of $26,956.80. To qualify for a 8.99% APR loan, a borrower will need excellent credit, a loan amount less than $12,000.00, and a term of 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to pay off qualifying existing debt directly; or showing proof of sufficient retirement savings, could help you also qualify for lower rates. Funding time periods are estimates and can vary for each loan request. Same day decisions assume a completed application with all required supporting documentation submitted early enough on a day that our offices are open. Achieve Personal Loans hours are Monday-Friday 6am-8pm MST, and Saturday-Sunday 7am-4pm MST. $6,000 savings: Average savings claim for personal loans are based on 2023 data for 2, 3, and 4-year terms on funded debt consolidation loans for $21,600. Savings will vary based on several factors, subject to credit approval and other conditions. Any savings will be reflected in the offer.

Home Equity loans are available through our affiliate Achieve Loans (NMLS ID #1810501), Equal Housing Lender. All loan requests are subject to eligibility requirements, application review, loan amount, loan term, and lender approval. Product terms are subject to change at any time. Offers are a line of credit. Loans are not available to residents of all states and available loan terms/fees may vary by state where offered. Line amounts are between $15,000 and $300,000 and are assigned based on product type, debt-to-income ratio, and combined loan-to-value ratio. Minimum 640 credit score applies for debt consolidation requests, minimum 700 applies for cash out requests. Other terms, conditions and restrictions apply. Fixed rate APRs range from 8.75% - 15.00% and are assigned based on underwriting requirements; offer APRs include a .50% discount for automatic payment enrollment (autopay enrollment is not a condition of loan approval). Example: average HELOC is $57,150 with an APR of 12.75% and estimated monthly payment of $951 for a 15-year loan. 10, 15, 20, and 30-year terms available (20 and 30 year terms only available for cash out requests). All terms have a 5-year draw period with the remaining term being a no draw period. Payments are fully amortized during each period and determined on the outstanding principal balance each month. Closing fees range from $750 to $6,685, depending on line amount and state law requirements and typically include origination (3.5% of line amount) and underwriting ($725) fees if allowed by law. Property must be owner-occupied and combined loan-to-value ratio may not exceed 80%, including the new loan request. Property insurance is required and flood insurance may be required if the subject property is located in a flood zone. You must pledge your home as collateral. Contact Achieve Loans for further details. Monthly savings claim is based on average monthly debt savings from originated loans for 2023. Monthly savings varies based on each loan situation and can be more or less than $800.

Affiliated Business Arrangement Disclosure: Achieve.com (NMLS #138464) and Achieve Loans are both wholly owned subsidiaries of Achieve Company. Because of this relationship, your referral to Achieve Loans may provide Achieve.com a financial or other benefit. Where permitted by applicable state law, Achieve Loans charges: 1) an origination fee of 3.50%, and 2) an underwriting fee of $725. You are NOT required to use Achieve Loans for a home equity line of credit. Please click here for the full Affiliated Business Arrangement disclosure form.

Resolution is available through our affiliate Achieve Resolution (NMLS ID # 1248929). All estimates for Achieve Resolution’s services are based on prior results, which will vary depending on your specific enrolled creditors and your individual program terms. Not all Achieve Resolution clients are able to complete their program for various reasons, including their ability to save sufficient funds. Achieve Resolution does not guarantee that your debts will be resolved for a specific amount or percentage or within a specific period of time. Achieve Resolution does not assume your debts, make monthly payments to creditors or provide tax, bankruptcy, accounting or legal advice or credit repair services. Achieve Resolution’s services are not available in all states, including New Jersey, and their fees may vary from state to state. Please contact a tax professional to discuss potential tax consequences of less than full balance debt resolution. Read and understand all program materials prior to enrollment. The use of Achieve Resolution services will likely adversely affect your creditworthiness, may result in you being subject to collections or being sued by creditors or collectors and may increase the outstanding balances of your enrolled accounts due to the accrual of fees and interest. However, negotiated settlements Achieve Resolution obtained on your behalf resolve the entire account, including all accrued fees and interest. C.P.D. Reg. No. T.S.12-03825.

© 2024 Achieve.com. All rights reserved. NMLS #138464