The most important components of a budget
Building a budget often starts with gathering information about income, expenses, debts, and savings goals.
You may want to account for emergency expenses, retirement contributions, and other miscellaneous expenses while putting together a budget.
Multiple frameworks exist to help with budgeting, including the zero-based budget, pay yourself first framework, and the 50/30/20 rule.
The foundation: Tracking your total income
Identifying all revenue streams
To begin budgeting, it can be helpful to start by listing your total income, which typically includes your paycheck. You might also want to think about other sources of income, such as bonuses, commission, or income from part-time work.
Gross vs. net income
Gross income refers to the total amount of money you receive before taxes. Generally, in budgeting, net income refers to your pay after taxes have been taken out.
Handling fluctuating income
Some people may find it helpful to calculate a budget for fluctuating income using conservative income estimates. Budgeting based on lower income months instead of higher income months may help avoid overspending.
Fixed vs. variable expenses: Knowing the difference
Fixed expenses (the "must-haves")
Fixed expenses generally refer to things that are must-haves, and their expense amounts generally stay the same each month. Examples often include necessities like food, rent or mortgage payments, insurance costs, or childcare.
Variable expenses (the "flexibles")
Variable expenses are regular expenses that may fluctuate in amount or that may not occur every single month. Examples may include groceries, transportation, or utility costs.
Discretionary spending (the "wants")
Fixed and variable expenses tend to include many necessary living costs. Discretionary expenses typically encompass “wants” like going out to eat or taking a vacation.
Savings and debt repayment: Prioritizing your future
The emergency fund foundation
It can often be a good idea to build an emergency fund in case unforeseen circumstances or emergencies pop up. A general guideline could be saving up 3-6 months or more of your typical monthly expenses.
Retirement contributions
It can also be a good idea to consider budgeting for retirement contributions. Including them in your budget could help make retirement savings a priority rather than an after-thought.
Strategic debt repayment
Building a budget typically means including money for debt repayment. Some people may find it helpful to structure their budget so it allocates higher payments toward higher interest debt.
Whether you’re looking to help your short-term cash grow or you’re starting an emergency savings account, the Raisin platform will let you compare competitive rates in one place to help you reach your goals.
The "often forgotten" budget components
Sinking funds for irregular expenses
Some costs, such as car repairs or medical expenses, may be somewhat expected but not always predictable. Setting aside some money in your budget each month to build a sinking fund for these types of expenses may be a good idea.
Miscellaneous/buffer category
If there’s room in the budget, many people may find that building in some savings for miscellaneous expenses can provide some extra peace of mind. This miscellaneous budgeting category could be used for things like buying gifts or subscribing to streaming services, or it could serve as a buffer in case you have an unexpected expense.
Popular Budgeting Frameworks
The 50/30/20 rule
One budgeting framework option involves setting aside 50% of your income for needs, 30% for things you want to buy, and 20% for savings goals or repaying debt.
Zero-based budgeting
Another framework is zero-based budgeting, which assigns a purpose to each dollar of income. At the end of the month, your budget would balance to zero.
Pay yourself first
The pay yourself first framework suggests setting aside a specific amount for savings, even before budgeting for expenses.
Behavior elements of a successful budget
Consistency and routine
Getting into the habit of budgeting may take time. It can be helpful to choose a consistent budgeting period, such as a monthly budget, and set aside time regularly to review and adjust your budget as needed.
Flexibility and grace
If you make a mistake or budgeting does not go as planned, it can be helpful to extend yourself some grace. You may also want to build some flexibility into your budgeting habits, such as allowing yourself to reallocate money if you find that one expense category tends to be higher than anticipated.
Bottom line
Income, expenses, savings, and debts are some of the important components of budgeting. Whether you choose the 50/30/20 budget, zero-based budgeting, pay yourself first framework, or something else, it can be helpful to remember that building this habit might take some time.
If you’re focused on saving money as part of your budgeting process, the Raisin platform can help. It lets you compare multiple rates for certificates of deposit (CDs) and high-yield savings products in one place.
Frequently asked questions
Many parts of a budget, such as income, debt, expenses, and savings goals, play important roles.
You could choose to create a sinking fund, an emergency fund, a miscellaneous budgeting category, or a combination of each to help budget for yearly expenses.
Generally, a budget should include post-tax dollars since that is often considered “take-home pay.”
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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