We don’t talk about budgeting as often as some other financial influencers, but it’s an essential step in your wealth-building journey. Not everyone needs a budget; you may have graduated past budgeting and moved on to a cash management plan (you know what you can spend, your savings/investments are stacked and on autopilot, and you don’t sweat the small stuff). Budgeting is especially helpful early in your journey as you start building good financial habits. It can also help you maximize every dollar if you aren’t yet working with a high income.

How do I start a budget?

You don’t need any fancy tools to start a budget. You can start with as little as an Excel spreadsheet or a pen and piece of paper (you can check out some of the best free Google Sheets budgeting templates here). If you prefer a more advanced solution, there are free budgeting apps, like Mint, and paid options, such as YNAB (You Need A Budget). When downloading an app or opening an Excel spreadsheet for the first time, you need to start by understanding exactly how much you make and spend in a month. If you are a salaried employee this is easy, but it may be more difficult if your income fluctuates from month-to-month. Once you know where your money is going every month, you can better plan for where it should and will go in the future.

How much should I spend?

Now to the hard part: how do you actually budget? Tracking how much you make and spend is easy and can be done automatically with an app. Allocating and budgeting your money intentionally to accomplish the financial goals most important to you is more difficult. We’ve tried to make it a little easier with some budgeting ground rules, all based on your gross income (the amount before any deductions, including taxes).

Budgeting Ground Rules

1. Invest 25% of your gross income for retirement.

Pay yourself first and save off the top of your paycheck, before allocating what you will spend on other expenses. Aspirationally the goal is to invest 25%, but that may be difficult to reach, especially early in your career. Start investing as early as you can, even if it’s with as little as $20 a month. Investing 25% of your gross income for retirement is first on this list for a reason; if you check the box on number one, what you spend on other expenses can be more flexible.

2. Aim to keep housing expenses below 25% of your gross income.

Try to keep housing expenses, including rent/mortgage payment, taxes, and insurance, to 25% of your gross income or less. If you live in a high cost of living area, it may not be possible to keep housing expenses to 25% or less of your gross income. If this is the case, you may need to cut back in other areas to accommodate higher housing expenditures. Remember, if you check the box on number one, you have more flexibility to spend in other areas how you wish.

3. Keep any car payments to 8% of your gross income or less.

If you do have a car payment, or more than one car payment, aim to keep your monthly payment(s) below 8% of your gross income (along with putting 20% down and paying your vehicle off in three years or less, or one year if a luxury vehicle). Keeping your monthly payments to 8% of your gross income helps ensure you aren’t buying too much car and are buying vehicles that fit within your monthly budget.

4. What about everything else?

How you spend the remainder of your budget is largely up to you. We don’t have rules for how much you should spend on food, dining out, vacations, entertainment, electronics, or other discretionary expenses. Investing 25% of your income for retirement requires a great deal of discipline, and if you have the discipline to invest that much for retirement while keeping your debt payments within our guidelines, rules for the rest of your budget aren’t necessary. Spend money on what brings you happiness – maybe that’s annual vacations with your family, dining out with your spouse, building memories with friends and family, or getting the latest and greatest consumer electronics (much of which fits into Step 8 of the Financial Order of Operations).

Next Steps

Once budgeting and efficiently allocating your resources is second nature, what’s next? Some feel that budgeting helps them save and invest more, even if they have reached a point where it’s second nature and may not be a necessity. Others prefer to take the budgeting training wheels off and stick to a more fluid cash flow management plan. No matter whether you plan to budget for the rest of your life or just as long as necessary to set yourself up for long-term success, make sure you are investing 25% of your gross income for retirement.

Reviewing the Budgeting Process

Not sure where you are at in the budgeting process or where to start? Review the steps below to starting (and maintaining) a healthy budget.

  1. Choose your tool. You don’t have to pick one and stick with it, but you need a place to start. This could be as simple as a spreadsheet or a more advanced solution, like a paid subscription to an app.
  2. Know where your money is going. Before you can decide how to efficiently allocate your resources, you need to know exactly how much you are making and where it’s going.
  3. Plan your budget. Aim to invest 25% of your gross income for retirement, if you are able, and keep our housing and car rules in mind. Depending on how you are doing, big changes to how much you currently spend may or may not be necessary.
  4. Track your progress. How are you doing? Are you staying on-track with your budget or are things going differently than expected? Don’t be afraid to make changes and adjust course if your current plan isn’t working.
  5. Automate your financial life. You may reach a point where it isn’t necessary to budget every single dollar you make, and you can save and invest adequately without following a strict budget.

Budgeting, frankly, isn’t fun for the majority of the population. It can feel constricting and limiting, but when done right, budgeting can help you achieve your financial goals more quickly and efficiently. When creating a budget and a plan for your Army of Dollar Bills, you may feel overwhelmed by the number of decisions you have to make. Just because you have the discipline to stick to a budget and save doesn’t mean you know what to do with every dollar. Our online course, the Financial Order of Operations, offers nine tried-and-true steps to help you make the most of your money and secure your financial future.

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