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Budgeting to Save - How to Budget to Save Money

Updated on January 23, 2011

Setting Goals for Your Personal Budget

 The majority of people who are wealthy, or even just living comfortably, didn't get there immediately. One of the most important tools to use when you're looking to increase your net worth is a sensible budget strategy, based on a combination of short and long term goals. Before you start planning your budget, you should set out of a few of these goals for yourself.

When creating a financial goal for your budget, keep the following principles in mind:

  • Be realistic. Make sure your goal is something you can reasonably achieve in the given time period. This means no planning to be a millionaire by next year or win the lottery.
  • Set a time frame. A short term goal is something you want to achieve within the next year or two. Long term goals are things that will take a few years to achieve.
  • Create a plan. When writing your budget, make sure to have a plan to reach these goals and incorporate it in. You don't have to stick with it 100% -- goals can change with time -- but it will help you to have it planned out.

An example short-term goal: Pay off credit card debt within 2 years. You can plan to do this by setting aside money for credit card payments in your budget.

An example long-term goal: Save and/or invest money for your retirement, or your child's college expenses. You can plan to do this by making regular deposits into a college savings or IRA account.

Exactly how you reach these goals will be dependant on your ability to budget to save.

Why Budget to Save?

Surprisingly, many people with more modest incomes are the best at budgeting to save. This is because they often have to have a sound budget in order to avoid overspending on a more limited salary. Where your income goes is important, and the best way to manage this is with a budget.

There are many benefits to having a budget, including:

  • Understanding where your income is spent. This will give you a more realistic picture of when you can afford to splurge, and when you're better off saving up.
  • Keeping your account balances in the positive. Once you have an understanding of your income and expenses, you are better able to avoid spending more than you make.
  • Saving and investing to meet financial goals. A budget lets you set aside extra money to go towards paying off debt, building up assets, and being prepared for emergency expenses.

By recognizing areas where you can reduce expenses, you will notice that you have more money for the things you want and need.

Creating Your Budget

In order to create your budget, you need a few simple calculations.

  • Your monthly income. Your budget should be based on how much money you make each month, after all taxes and other deductions. If you have a job where you don't get the same amount of income each month (ex. self-employed or tip-based pay), make your best estimate.
  • Your montly expenses. Right away, determine all of your fixed expenses. This includes things like rent, loan payments, and cable service, that cost the same amount each month. Then determine your variable expenses, like food and gas, that can vary from month to month. Use an estimate for these based on usual costs.
  • Your net monthly income. Monthly income - monthly expenses = monthly net income. This determines how much money you have left each month to put towards saving for your financial goals. To avoid overspending, you should always underestimate your income and overestimate your expenses when you're unsure about the exact amounts.

Examples of monthly income sources:

  • Paychecks after taxes, insurance, and other deductions
  • Alimony or child support payments
  • Pension or social security benefits
  • Miscellaneous income (gifts, overtime pay, etc.)

Examples of montly expenses:

  • Rent or mortgage payments
  • Utilities (electricity, gas, water, garbage)
  • Phone, cable/satellite, and internet service
  • Insurance (life, car, renter's/homeowner's)
  • Credit card payments
  • Groceries and household supplies
  • Clothing and personal care
  • Gasoline and car maintenance
  • Miscellaneous expenses (entertainment, meals out, emergency expenses, etc)

At the beginning of the month, estimate your income and expenses in all of the categories that are relevant to you, and use these estimates to determine what you expect your monthly net income to be. At the end of the month, determine the difference between your estimates and how things actually turned out. You can use these to help make your next set of estimates more accurate.

Evaluating Your Monthly Net Income

The final step in budgeting to save is evaluating your monthly net income.

If it is negative, you are spending more than you make! Try to reverse this by using the following tips:

  • Decrease unneccessary spending. Lower grocery and clothing costs by spending less on name brands, which are usually more expensive. Spend less on entertainment, like trips to the movies or eating dinner at restaurants.
  • Reduce usage of utilities. Conserve gas, water, and electricity by not using them more than you need to.
  • Make the most of sales and coupons. Websites like are dedicated to saving money through smarter shopping.
  • Add some extra income. Take on some extra hours, a work at home opportunity, or maybe even a part time job to put you back in the green.

If it is positive, you have extra money to save towards you goals. Use it wisely, with these principles in mind:

  • Divide the money between all of your goals. You don't have to divide it evenly, but make sure that something is going towards each of your goals every month.
  • Prioritize between needs and wants. Saving for a retirement fund or paying off debt is probably more important than buying a new Apple iPad. If your net income comes up short one month, make sure that more money goes towards the more important things.
  • Have an emergency fund. In the case of sudden expenses or reduction in income, like a car breaking down or missing work due to illness, make sure than you have money set aside to avoid ruining your monthly budget. This makes sure than you never have to withdraw from your other goals to make ends meet in the case of an emergency.

Some potential usages of your monthly net income:

  • Emergency funding
  • Funding retirement or your children's tuition
  • Saving to buy a new home or car
  • Paying off credit cards or other debt
  • Birthday or holidays gifts for others
  • Being able to treat yourself
  • Buying shares of money markets, bonds, mutual funds, stocks, and other investments
  • Accumulating interest in a savings account

Over time, your budget will become more accurate and you will be able to reach your financial goals. You will find that you are no longer living paycheck to paycheck, or worried about emergencies emptying your bank account. Something as simple as having a balanced budget can have a huge impact on how comfortable you are in your daily life.

What is your budgeting status?

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    • danieliuhasz profile image


      8 years ago from Romania

      Couldn't live without a budget. I guess that planning is part of my life..


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