A Guide to Budgeting

Introduction

 

Mastering budgeting and money management is crucial for achieving financial stability and reaching financial goals. Proper budgeting can mitigate financial anxiety and uncertainty while helping you achieve your short-term and long-term financial objectives. This page provides a comprehensive guide to budgeting, covering the following topics:

  • Creating a Budget

  • Cash Flow Waterfall

  • Budgeting Tips

  • Additional Resources

Creating a Budget

  1. Track Your Income and Expenses: Record every transaction to get a clear picture of your financial situation.

  2. Categorize Your Expenses: Divide your spending into essential and discretionary categories to identify areas for improvement.

  3. Set Financial Goals: Determine what you want to achieve and allocate your money accordingly.

  4. Choose a Budgeting Method: Select a budgeting approach that works for you, such as the 50/30/20 rule, zero-based budgeting, or envelope budgeting.

 Cash Flow Waterfall

Each person’s financial situation is unique. The cash flow waterfall below represents a general budgeting guideline. Please note that financial decisions are not one-size-fits-all.

This budget employs the 50/30/20 budgeting rule, whereby after-tax income is split into three categories of spending: 50% on needs, 30% on wants, and 20% on savings.

  • Identify all sources of income, including salary, investments, and any side jobs to calculate your total monthly income.

  • Try to allocate no more than 50% of your after-tax income towards necessary expenses, including:

    • Housing (rent / mortgage, utilities, insurance)

    • Food and groceries

    • Transportation

    • Mandatory payments on debts (credit cards, loans)

    • Insurance (health, disability, life)

    • Essential Services (phone, internet, subscription services)

  • Carve out up to 30% of your after-tax income for non-essential purchases, including:

    • Dining out

    • Clothing and accessories shopping

    • Gym and club memberships

    • Travel

    • Hobbies

  • Invest the remaining 20% of your after-tax income in order of the following steps, getting as far as you can. Do not worry if you do not complete every step -- any progress is still progress!

  • Aim to save 3-6 months' worth of living expenses in a readily accessible savings account. Consider keeping the emergency fund in a high-yield savings account or money market fund.

    The emergency fund will be increased further down the waterfall.

  • Aim to take full advantage of your employer's 401(k) or 403(b) match, which is typically 3% to 6% of your income.

    The 401(k) / 403(b) contribution will be increased further down the waterfall; contribute the full match amount if possible as the dollar-for-dollar match can be viewed as free money.

  • Identify high-interest debts, such as credit card balances, and aim to pay down the remaining principal as possible.

    Consider the debt avalanche method (paying off highest-interest debts first) or the debt snowball method (paying off smallest balances first) to determine the debt paydown priority.

    Read more in the Guide to Debt.

  • Once high-interest debt is paid off, allocate more funds towards building additional emergency reserves. Aim to save 6-12 months' worth of living expenses in a readily accessible savings account.

  • If you have a high-deductible health plan, consider allocating a portion of your income towards building tax-advantaged savings for medical expenses in a health savings account (HSA).

    For 2024, the maximum HSA contribution is $4,150.

  • Contribute to an IRA (traditional or Roth) up to the annual limit.

    For 2024, the maximum IRA contribution is $7,000 for those under age 50, and $8,000 for those age 50 or older.

    Read more in the Guide to Retirement Planning.

  • Contribute to a 401(k) or 403(b) up to the annual limit.

    For 2024, the maximum 401(k) / 403(b) contribution is $23,000 for those under age 50, and $30,500 for those age 50 or older.

    Read more in the Guide to Retirement Planning.

  • As available, allocate a portion of your income towards investing in a taxable brokerage account.

    Read more in the Bootcamp.

  • Regularly review your budget to ensure you are on track to meet your financial goals. Adjust your allocations as needed to reflect changes in income, expenses, or financial priorities.

Budgeting Tips

Account for Irregular Expenses

Make sure to budget for expenses that don't come up regularly, such as car maintenance or property taxes.

Avoid Lifestyle Inflation

Be mindful of the temptation to increase your spending as your income increases, and instead, direct excess funds towards savings and investments.

Prioritize Needs Over Wants

Be honest with yourself about what you need versus what you want, and allocate your money accordingly.

Consider Other Savings Goals

Consider allocating your income towards other goals, such as saving for a down payment, building a fund for major expenses, or donating to charity.

It’s never too early or too late to begin…