What to prioritize when making a budget? Tips on creating and sticking to one

USA Today

22-04-2025

What to prioritize when making a budget? Tips on creating and sticking to one
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Online calculators to help with saving, budgeting
Online calculators can help you set a budget to help you save money and pay off debts.
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Budgets. You know you should have one, but if checking your bank account stresses you out, the idea of tracking your spending can seem like the worst way to spend an afternoon.
But, one of the biggest financial mistakes you can make is not monitoring your money, according to Annamaria Lusardi, who heads Stanford's Initiative for Financial Decision-Making.
'This is not an unbiased world that we face. Firms spend millions of dollars to make people spend,' Lusardi said. 'I tell my students, by the time you leave this classroom, and you go back to your dorm, you'll have five opportunities to spend. There is nothing, no sign, no advertisement, that says 'Please stay within your budget.''
You may think you have a budget. You might have an idea of how much you think you make, spend, and where you should cut back. But financial experts told USA TODAY people generally overestimate their earnings and underestimate their spending.
Taking the time to determine your exact financial situation and set goals can be an enlightening experience. Yet while 'how do I budget' seems like a simple question, knowing exactly where to start can be complicated. Here is a guide to help:
More: 4 easy ways to save money on your monthly bills
Figure out where you are now
First, you need to know how much money you make. Look for your take home pay after taxes and deductions for things like a 401(k). If you don't have a stable income, freelance, or do gig work, take the average of your last several few months of income, and make a reasonable prediction about what you will make knowing what jobs you have lined up.
If you're self-employed, this might also be a good time to think about the amount you're setting aside for taxes.
'Nobody is withholding money for you, and suddenly it comes to the end of the year and you're going to owe taxes,' said Tim Rupert, a professor of accounting at Northeastern University. 'That can be a real surprise for people. Oftentimes people think, 'Oh, I don't earn that much money,' so they overestimate what they're going to get to keep.'
Second, you need to know how much money you have to spend. Identify your fixed expenses. These are going to be costs like utility bills or payments for rent, a mortgage, a car, and insurance.
Third, you should look at where else your money is going and identify your variable expenses. Although groceries are a necessity, for instance, there are ways you can lower those bills. Variable spending also includes things like eating out, shopping, and travel.
Subtract your fixed and variable expenses from your income. Are you spending less or more than you earn?
Once you have a firm grasp on where you are, you can figure out where you want to go.
Set goals and priorities
Your goals will depend on your current financial situation. Experts agree that covering bills and making the minimum payment on debts on time are most people's first priorities. If you're not doing that, although you may be tired of hearing it, experts suggest looking at ways to increase your income like getting a second job or decreasing your expenses by canceling subscriptions or not getting takeout.
Once you've got your bills and minimum payments taken care of, you'll want to tackle high-interest debt, like credit cards, and build a starter emergency fund of a few hundred dollars.
Ray Charles "Chuck" Howard, an associate professor of business administration at the University of Virginia, said people should focus on the goal that they are personally most motivated to reach.
'The rational response is almost certainly to pay down the debt,' Howard said. 'But you can imagine a circumstance in which you encounter some emergency expense that throws you into even more debt and makes you even more demotivated to improve your financial well-being, so it depends on the person.'
If your employer offers a 401(k) match, this is also the time to start thinking about getting some free money. Consider contributing enough to an employer-sponsored retirement account to fully capture the match so you're not leaving money on the table.
Once you've paid down toxic debt and have your employer's 401(k) match, you should continue to build up that starter emergency fund. Conventional wisdom suggests saving three to six months of expenses to prepare for a rainy day and avoid more bad debt.
Next, budget for goals like a home, vacation or car
Next, it's time to pay off debt with lower interest rates like student loans or a mortgage and contribute more to retirement accounts. Then, feel free to invest in yourself. Set savings goals for a new home, car, or a vacation.
Experts agreed that although this timeline of goals can work for a lot of people, everyone's circumstances are different.
'It has a lot to do with priorities,' Lusardi said. 'If you live in an area where you know you need a car to go to work, or you're building a family and need the car to bring your child to school... you have to make it a priority.'
Choose tools to track your progress
While making a budget, you may choose to use a time-tested budgeting strategy that works for you. Popular methods include 50/30/20, paying yourself first, and envelope budgets.
The 50/30/20 strategy involves putting 50% of your money toward needs, 20% toward savings, and 30% toward wants. The pay yourself method means that the first "bill" you pay when you get your paycheck is a contribution to your savings account. With an envelope budget, you put set amounts of money into different categories like entertainment or shopping, and once it runs out, you can no longer spend in that category.
Rupert said the biggest mistake people make with budgets is not sticking to it once they've made one.
'People oftentimes have really good intentions to start,' he said. 'For most of us, it's not fun sticking to a budget.'
But to be successful, you must track your progress, and there are a lot of tools out there to help.
You can automate your savings by setting up a split deposit, which is when a portion of your direct deposit goes directly to a savings account before the rest ends up in checking. Another option is to set up automatic transfers from your checking to savings account.
The Federal Trade Commission also offers a free monthly budget worksheet online and Google Sheets has free monthly and annual budget templates anyone with a Google account can use. Additionally, there are several apps people can download and use on their phones that help track spending including Quicken Simplifi, PocketGuard, or Goodbudget.
Howard said he uses a 'good, old-fashioned" Excel spreadsheet.
'The ease of using an app is a benefit for a lot of people so I don't want to undersell that,' he said. 'But for me personally, if I invest some time and effort into a spreadsheet, I don't want that to go to waste. So, I end up using it.'
Celebrate wins, no matter how small
In terms of savings goals, Howard determined through his research, that it is sometimes helpful to set optimistic budgets rather than realistic ones.
He imagined a scenario in which someone currently spends $1,000 a month at restaurants and sets a goal to spend only $200 the next month. Because that is a 'really aggressive' behavior change, he said, most people won't only spend $200, but they may spend $500 because they set an optimistic goal.
'A lot of personal finance folks will look at that outcome and say well this is no good, this person overspent their budget,' Howard said. 'That's absolutely a wrong frame of mind to be in. I think that person is a success story because they're spending $500 less than they used to.'
It's important to celebrate wins while budgeting, and those will look different for each person.
Howard imagines another scenario where someone has $10,000 in credit card debt with a 25% interest rate and a $1,000 loan from the bank with a 9% interest rate.
He said although rationally, that person should be paying down the credit card debt, a lot of people would feel more motivated if they first took the $1,000 loan off the books.
'Financially, it's not necessarily the optimal thing to do, but if it makes you happy and then subsequently more motivated to tackle the $10,000 debt with 25% interest. More power to you.'
Reach Rachel Barber at [e-mail] and follow her on X @rachelbarber_