Budgeting Calculator
What is a budget?
A budget is an estimation and planning of income and expenses, and commonly refers to a methodical plan for spending money in a certain way.
Budgets are generally created to achieve certain financial goals, such as paying off multiple credit cards, reaching a savings goal, or regularizing income and expenses. There are many reasons why people create budgets, and even more ways to do so. While some people may prefer our budget calculator or our free template, others may prefer different methods. Modern technology has given rise to a wide variety of budgeting software and apps. They all have their advantages and disadvantages, but the one that works best is the one that budgeters strive to maintain as much as possible.
How to Create a Budget
Budgeting generally boils down to two things: living within your means and planning for the future. A successful budget generally involves having a detailed personal budget and sticking to it.
Living Within Your Means
Ancient religious teachings, countless online resources, and thousands of financial advisors have echoed the principle of living within your means. Although it may seem simple, many struggle to successfully implement it in their lives, as evidenced by the statistic that eight out of ten Americans are in debt. The reason people fail to adhere to this principle is generally due to reasons such as:
Spending more than their income allows: The biggest financial mistake a person can make is simply spending more than they earn, which eventually snowballs into a larger and larger amount of money.
Trying too hard to keep up with others: In consumerist societies, conspicuous consumption, defined as spending money and acquiring luxury goods and services to publicly display one’s financial power, is common.
Excessive reliance on credit: This borrowed money allows people to temporarily live beyond their means. However, if borrowers are unable to repay the borrowed money on time, they will likely find themselves in a difficult financial situation. Lack of knowledge: Not everyone is expected to be an expert in personal finance, and misinformation or lack of knowledge may very well lead people to live beyond their means. Therefore, it can be helpful to learn more about personal finance.
Planning for the Future
There is a reason why entire departments exist in many companies solely for the purpose of budgeting and forecasting, as budgeting and forecasting are very important factors in achieving certain financial goals. This concept also applies to individuals, as it can be difficult to successfully achieve personal financial goals without prior planning. Proper planning can help predict future financial situations based on the best estimates of income and expenses. Proper planning can also help with:
- Mitigating unforeseen events (we all face expected and unexpected events in life).
- Accumulating emergency funds.
- Overcoming periods of heavy debt.
- Prepare for the purchase of a home, car, or other major purchase.
- Properly manage investments.
- Prepare for retirement, children, or education.
- Purchase appropriate insurance.
A personal budget can help people live within their means and plan for the future. The Budget Calculator evaluates the components of a personal budget and highlights specific areas that need improvement.
Budget Template
We’ve created a free, basic budget template for those who want to start budgeting their personal finances monthly. While it’s not the most feature-rich budgeting tool in the world, it was created to motivate people to begin achieving their budgeting goals, then move on to more complex budget planning tools. It can also serve as a complementary tool to annualize net income, calculated with our Budget Calculator. It also includes a calculation for the annualized expense-to-income ratio. Use our Budget Calculator monthly and update the figures in a saved version of our template. The annual net income will update accordingly. Click here to download our free budget template.
Income
The primary source of income for most budgeters comes from their job, whether full-time or part-time, in the form of a salary or wage. The second largest source of income typically comes from investments and capital gains, and there are other ways to earn additional income.
Obviously, anyone would like a higher income. In addition to increased spending, whether conspicuous or not, a higher income allows for greater spending flexibility; a month of excessive spending can be quickly offset by a sufficiently high income. While achieving higher income is easier said than done, it is generally achieved through several main avenues: looking for a new job, pursuing higher education, such as additional degrees or certifications, developing new skills, or networking with the right people. For some budgeters, increased income can come from investment income, although this method typically only works long-term. In some situations, a second job may be necessary to make ends meet.
Expenses
Housing and Utilities
Most budgeters typically consider rent or a mortgage as the largest portion of their monthly housing expenses. A general rule of thumb is that housing costs should not exceed 30% of gross monthly income, plus or minus. Anyone who finds their housing costs significantly higher may want to consider more cost-effective housing options. This may include refinancing for a lower rate, moving to a more affordable location, or, if possible, downsizing. You may also consider renting out an extra room if you have one to generate income. Other ways to save on housing costs include switching to new smart technologies that generally tend to be more energy-efficient, such as programmable thermostats, energy-efficient light bulbs, and installing solar panels. For more specific information or calculations, visit any of the calculators below.
Transportation
For most people on a budget, the bulk of transportation expenses will likely be a car payment or loan. There is generally plenty of room to reduce this expense, as retail prices for different cars vary considerably. Choosing a car within a specific price range will go a long way toward achieving your financial budget goals. As a general rule, monthly car payments should be less than 10% of your gross income. Other transportation expenses typically include fuel, maintenance, and insurance. There are several ways to try to reduce transportation expenses. First, depending on the region, owning a car is not an absolute necessity, and alternative transportation options exist. If possible, use public transportation, carpool, bike, or walk. These options can not only help a person stick to their budget, but they are also environmentally friendly, and some can provide exercise. Perhaps consider owning a more fuel-efficient vehicle. If owning a car is a must, routine maintenance can help keep it in top condition. This can include properly inflating tires, performing oil changes, and tuning the engine. Also, try to stay informed about traffic laws and drive motor vehicles legally; traffic violations will not only result in fines but can also cause increased auto insurance premiums. Car owners who find they are paying too much for fuel might consider changing their driving habits, such as aggressive acceleration. As a general rule, try to keep total transportation costs below 15% of their income.
Other Debt & Loan Payments
Credit cards have negative connotations when it comes to budgeting, as people tend to use them to spend more than they can afford. It’s important to remember that credit cards aren’t an inexhaustible resource and must be paid on time to avoid high interest rates.
While credit cards can exacerbate debt, if used with strict control, they can be incorporated into your budget as a way to save on purchases and even build a good credit history. However, especially for those on a tight budget, it’s important to use credit cards sparingly to avoid high interest rates that could further impact your budget. For more specific information or calculations, check out any of the calculators below.
It’s important to make sure you’re not accumulating expenses when accounting for student loans, personal loans, or credit card debt in your budget. For example, don’t add $20 to your credit card and eating out for the same dinner. This applies to student loans, tuition, and credit card balances that are carried over month to month.
Living Expenses
While expenses associated with daily living may seem insignificant compared to other categories, they can quietly add up. One category with ample room for improvement in a budget is “Eating Out.” Cooking at home is often much more cost-effective than eating out, and depending on how often you eat out, eating out more often can significantly reduce living expenses.
“Food” and “Eating Out” are part of the expense breakdown in the results. In general, this combined expense should be less than 15% of income.
Healthcare
In the U.S., healthcare costs about $10,000 per person per year on average. Unfortunately, this is an expense that generally has little flexibility in a budget. However, there are some strategies that can be used to potentially reduce healthcare costs:
Don’t smoke, eat healthier, get enough sleep, and exercise regularly.
Visit in-network doctors, hospitals, and facilities.
Regularly reassess your health insurance needs. Use tax-advantaged accounts designed for health expenses. In the US, this is called a Health Savings Account (HSA).
Buy generic medications whenever possible.
Older adults can try to reorganize their environment to reduce the risk of falls, as these are one of the most common events that generate large health expenses.
Childhood and Education
It is often said that investing in education is the best investment a person can make. Statistics show a high correlation between a higher level of education and a higher income. This category probably has less to do with cutting expenses and more with planning properly. Keep in mind that in most developed countries, government financial aid is generally very accessible, so regardless of your financial situation, a person can access higher education. Those struggling to pay off multiple high-interest student loans might consider consolidating them.
Having a child is often one of the most expensive (and time-consuming) expenses for any adult, so it’s important to plan financially. See any of the calculators below for more specific information or calculations.
Savings and Investments
In healthy budgets, leftover money is often allocated for the future, including retirement savings or investments, emergency funds, or college savings. It’s important for budgeters not to overlook the importance of an emergency fund; having one can make or break a person’s debt. If savings and investments are managed well, it’s not uncommon to see people with average incomes retire at an earlier age. As a general rule, it’s recommended that this section total 15% or more. See any of the calculators below for more specific information or calculations.
Miscellaneous Expenses
This spending section is typically the most flexible part of a personal budget compared to other categories like housing or savings. It includes a range of expenses that could fall within the fuzzy line between “needs” and “wants.” This leaves a lot of room for personal discretion, which can be positive or negative. The downside is that overspending can ruin a budget, but the upside is that moderation can relieve stress and potentially make it healthier. Important decisions like whether to take an expensive trip to the Maldives, attend a Super Bowl in the city, or whether it’s worth spending large sums on an art collection go a long way toward achieving financial goals. Lavish vacations, loving pets, and rewarding hobbies are all great ways to invest in yourself—only if financially feasible. For anyone looking to correct a shaky budget, this section should be the first area to evaluate.