The Ultimate Guide to Budgeting Money for Beginners

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how to create a budget

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I used to dislike the idea of budgeting. Following a budget seemed restrictive — even a little obsessive. I had no interest in tracking my income and expenses every day.

As it turns out, following a spending plan actually helps you stop worrying about money. Instead of playing a guessing game, you’ll know exactly where you stand.

Budgeting opens up a new sense of freedom by making you more aware. Even though everyone’s plan will look different, there are several features the best budgets have in common.

Here are some essential tips on how to create a budget and take control of your personal finances.

How to create a budget that works

1. Adopt a proactive mindset

If you’re turned off by the idea of budgeting, shift your mindset. Budgeting isn’t about feeling confined by your money. Rather, it’s about gaining control over your finances so they don’t control you.

Without an awareness of how you spend, it’s easy to make bad choices. You might spend more than you earn or get into high-interest credit card debt. When unexpected expenses pop up, you’ll have no way of dealing with them.

But if you have a budget, you’ll be prepared for the unexpected and you’ll know how to follow the golden rule of personal finance: Spend less than you earn. By following this rule, you’ll be able to handle your debts and save for the future.

If you’re living paycheck to paycheck, creating a budget can help you break free of this cycle. With an effective budget, you can gradually build up your emergency fund. If the worst happens and you lose your income, you’ll be covered for a few months while you figure out how to bounce back.

Ignoring your money makes you vulnerable to overspending and debt, and you may need to rely on others to help you out of a financial hole. But a proactive approach to budgeting will help you achieve independence.

2. Identify your major financial goals

Some lucky people learn about money management at a young age. Others only realize they need a budget after getting into debt. Whatever your motivation, take some time to identify your financial goals.

Maybe you want to stop living paycheck to paycheck, you’re eager to pay off your student loans, or you’re ready to start saving for retirement.

By setting goals, you’ll increase your motivation to create and stick to a budget and you’ll know exactly what you’re working toward. Once you start budgeting, you’ll be able to measure whether or not your efforts have been successful.

3. Ask yourself some tough questions

As you think about how to budget money and set goals, do a self-assessment. Look at your spending history and current habits. What are you doing well? What are you doing that stands in the way of your financial goals?

Identify any areas where you spend past your means and try to root out the cause of these poor habits. Do you shop to relieve stress? Are you trying to keep up with your friends? Do you spend money on a lot of little expenses that add up over time?

Ask yourself these questions to gain a deeper understanding of what you do and why you do it. By analyzing your habits and motivations, you’ll be one step closer to making lasting change.

4. Track your monthly income

Once you’ve done some self-reflection, it’s time to get into the nitty-gritty of budgeting. Your first order of business is to track your monthly income.

For those with a consistent paycheck, this task is straightforward. Just write down your take-home pay so you have a clear sense of your monthly income.

If your income is irregular, add up your typical earnings. You could calculate an average monthly income or keep tabs on it from month to month. Some apps, like Level Money and Digit, will look for patterns for you.

Besides expense tracker apps, which you’ll learn more about below, you could simply record your income on an Excel spreadsheet. By writing your income down, you’ll know exactly what you have to work with every month.

5. Categorize your expenses

Now it’s time to record your expenses. Write down all your recurring costs and put them into categories. The most common categories are:

  • Rent/mortgage
  • Utilities
  • Health insurance
  • Food
  • Credit card payments
  • Student loan payments
  • Car payments
  • Retirement savings account

After recording your recurring expenses, take a look at your non-essential spending. Common categories include:

  • Entertainment
  • Shopping
  • Restaurants and Dining

Food pops up in both categories, as it’s not always a consistent expense. You may find yourself spending more some months if you eat out at restaurants.

Some people try to track their spending in lots of specific categories, others lump all non-essential spending altogether into one big category. I prefer the latter, as it lets me use my spending money however I want. I don’t care if I’m spending a lot on lattes, for instance, as long as I don’t exceed my “non-essential spending” limit as a whole.

6. Try the 50/30/20 rule

Once you’ve recorded your income and expenses, it’s time to set some boundaries. The 50/30/20 rule is one way to approach your spending. It gives three guidelines:

  1. Use 50 percent of your income on essential living expenses. These include rent, utilities, food, and transportation.
  2. 20 percent of your earnings should go toward monthly savings goals. These might include paying off debt and saving for retirement. This isn’t to say that repaying loans is optional, but you must cover your basic living needs before you can pay back debt.
  3. Finally, the remaining 30 percent of your income is flexible. You might spend it on travel or going out to eat.

All of these percentages represent the maximum in each category. If you can spend less, you’ll have even more money to set aside in your savings account.

Of course, if you live in an expensive city, it could be tough to limit your living expenses to 50 percent — some people spend that much on rent alone. If your essentials cost more than 50 percent of your income, adjust the other categories. You might also consider what you can do to lower your cost of living or add to your income with a side hustle.

Remember that the 50/30/20 rule offers a general guideline for your budget. You may need to adjust the percentages to match your specific situation.

7. Use the envelope method

Even if you create a meticulous budget, you still need the self-discipline not to overspend. That’s where the “envelope method” of budgeting comes in. If you’re struggling with financial self-control, you might benefit from this technique.

With the envelope method, you spend primarily in cash. When you shop with credit cards, it’s easy to remove yourself from the transaction. With cash, you see exactly how much money you’re giving away.

For this budgeting technique, gather envelopes for each of your spending categories and fill them with the exact amount of cash you need that month. You can only spend that much and no more.

Once the envelope is empty, you can’t refill it until the following month. If you have any cash left over, put it into savings.

This method sets physical limits on your spending. Plus, it helps you become more aware of exactly how much you’re spending.

You don’t have to use the envelope method forever. Sometimes, it can be what you need to kickstart your budget and adopt healthier financial habits.

8. Automate your savings and bills

Another useful way to meet your saving goals is to set up automatic withdrawals. That way, you won’t have to think about setting money aside. After you do the initial set-up, your savings will slowly grow without any work from you.

Plus, automatic withdrawals will ensure you don’t miss important payments. You won’t go into default on your student loans or let your credit card balance carry over from one month to another.

This method can even save you money. Most student loans give you a 0.25% interest rate deduction when you set up automatic monthly payments. And credit card debt doesn’t accrue interest if you pay off your balance in full each month.

There are incentives for automatic payments, and it takes all the work of how to budget money out of your hands.

9. Start an emergency fund

It’s always a good idea to set aside money in an emergency fund. You need to prepare for an unexpected expense, such as a medical emergency or job loss.

A good rule of thumb is to save enough to support yourself through three to six months without an income. If an emergency comes up, you’ll have enough to cover it without derailing your budget.

Setting up a savings account with automatic withdrawals can help you build an emergency fund. You won’t really notice the money missing, but your savings account will grow over time.

10. Only spend with a credit card in real time

If you want to stick to your budget, be careful with credit cards. Credit cards can be excellent financial tools if used wisely, but overspending could trap you underneath high-interest debt.

If you don’t pay your balance in full each month, it will start to accumulate interest. Credit cards have high interest rates; the national average is around 15%. Even a small unpaid balance could grow astronomically in a short amount of time.

The way to avoid credit card debt is to spend only what you can reasonably pay off within the month. Just because you have credit to spend more doesn’t mean you should use it.

So pretend you’re spending money on a credit card in “real time.” Think about the money as if it’s coming straight from your bank account today. Don’t assume you’ll have any more money next month than you do now.

As long as you use the card wisely, you can reap the benefits of credit cards. You’ll build up your credit score and maybe even accumulate credit card rewards in the process.

11. Use apps

You don’t have to pore over a spreadsheet to track your income and expenses. There are several excellent apps that do all the math for you. Instead of learning exactly how to create a budget, you can rely on these apps to do the heavy lifting.

Expense tracker apps link up to your bank and credit card accounts to analyze your cash flow. They let you create a budget and track your progress. Here are three of the most popular tools for creating and tracking your spending plan:

  • Mint: Connects to your saving, checking, and credit accounts and looks for trends in your spending. It tells you how much you have left to spend in each category as you progress throughout the month. You’ll see weekly summaries and can set up reminders to pay bills.
  • You Need a Budget (YNAB): Connects to your financial accounts to track your budget. YNAB teaches you about money management and allows you to manually input earnings and expenditures. It costs $5 a month.
  • Level Money: Connects to your accounts to tell you exactly how much spending money you have each month. Rather than dividing your spending into specific categories, Level gives you one monthly “Spendable” category. It tells you whether or not you’re spending within your means.
  • Digit: Analyzes your cash flow to identify saving opportunities. Digit sets aside small amounts of money every few days in a secure savings account. You can transfer the money back into your checking account for no fee at any time.

Reflect on your progress and adjust as needed

Learning how to create a budget is the hard part. Once you’ve set it up, it doesn’t take a ton of work to maintain. Plus, expense tracker apps make budgeting especially easy, as they show you where you stand at a glance.

Don’t forget to review your progress every now and then. Take a look at your spending plan and make changes where needed. Perhaps you can take a more aggressive approach to paying off your student loans, or maybe you snagged a higher income and must work to prevent lifestyle inflation.

If you’re struggling with overspending, identify your shopping triggers. Often, you can find other means of stress relief without swiping your credit card.

Continue to look for areas where you can improve and try out new solutions. With this proactive approach, you’ll take control over your money — rather than the other way around.

Interested in refinancing student loans?

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LenderVariable APREligible Degrees 
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1 Important Disclosures for Laurel Road.

Laurel Road Disclosures

  1. VARIABLE APR – APR is subject to increase after consummation. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes.

2 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student Loan RefinanceFixed rates from 3.999% APR to 7.804% APR (with AutoPay). Variable rates from 2.480% APR to 7.524% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.480% APR assumes current 1 month LIBOR rate of 2.07% plus 0.91% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (

3 Important Disclosures for CommonBond.

CommonBond Disclosures

  1. Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). The following table displays the estimated monthly payment, total interest, and Annual Percentage Rates (APR) for a $10,000 loan. The Annual Percentage Rate (APR) shown for each in-school loan product reflects the accruing interest, the effect of one-time capitalization of interest at the end of a deferment period, a 2% origination fee, and the applicable Repayment Plan. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment, which is reflected in the interest rates and APRs displayed. Variable rates may increase after consummation. All variable rates are based on a 1-month LIBOR assumption of 2.08% effective July 25, 2018.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Education Refinance Loan Rate DisclosureVariable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2018, the one-month LIBOR rate is 2.07%. Variable interest rates range from 2.72%-8.17% (2.72%-8.17% APR) and will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a cosigner. Fixed interest rates range from 3.50%-8.69% (3.50% – 8.69% APR) based on applicable terms, level of degree earned and presence of a cosigner. Lowest rates shown require application with a cosigner, are for eligible, creditworthy applicants with a graduate level degree, require a 5-year repayment term and include our Loyalty discount and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty and Automatic Payment Discount disclosures. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of their loan.
  2. Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit We also have several resources available to help the borrower make a decision at, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
  3. Citizens Bank Education Refinance Loan Eligibility: Eligible applicants may not be currently enrolled, must be in repayment of their existing student loan(s) and must make the minimum number of payments after leaving school. Primary borrowers must be a U.S. citizen, permanent resident or resident alien with a valid U.S. Social Security Number residing in the United States. Resident aliens must apply with a co-signer who is a U.S. citizen or permanent resident. The co-signer (if applicable) must be a U.S. citizen or permanent resident with a valid U.S. Social Security Number residing in the United States. For applicants who have not attained the age of majority in their state of residence, a co-signer will be required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Education Refinance Loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, certification of borrower’s student loan amount(s) and highest degree earned.
  4. Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  5. Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
  6. Co-signer Release: Borrowers may apply for co-signer release after making 36 consecutive on-time payments of principal and interest. For the purpose of the application for co-signer release, on-time payments are defined as payments received within 15 days of the due date. Interest only payments do not qualify. The borrower must meet certain credit and eligibility guidelines when applying for the co-signer release. Borrowers must complete an application for release and provide income verification documents as part of the review. Borrowers who use deferment or forbearance will need to make 36 consecutive on-time payments after reentering repayment to qualify for release. The borrower applying for co-signer release must be a U.S. citizen or permanent resident. If an application for co-signer release is denied, the borrower may not reapply for co-signer release until at least one year from the date the application for co-signer release was received. Terms and conditions apply.
  7. Average savings based on 18,113 actual customers who refinanced their federal and private student loans through our Education Refinance Loan between January 1, 2017 and December 31, 2017. The calculation is derived by averaging the monthly savings of Education Refinance Loan customers whose payments decreased after refinancing, which is calculated by taking the monthly student loan payments prior to refinancing minus the monthly student loan payments after refinancing. The borrower’s savings might vary based on the interest rates, balances and remaining repayment term of the loans they are seeking to refinance. The borrower’s overall repayment amount may be higher than the loans they are refinancing even if their monthly payments are lower.
2.57% – 5.87%Undergrad
& Graduate
Visit Earnest
2.80% – 6.38%1Undergrad
& Graduate
Visit Laurel Road
2.48% – 7.52%2Undergrad
& Graduate
Visit SoFi
2.47% – 7.99%Undergrad
& Graduate
Visit Lendkey
2.57% – 6.65%3Undergrad
& Graduate
Visit CommonBond
2.72% – 8.17%4Undergrad
& Graduate
Visit Citizens
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.