You can create a basic budget for your everyday life by accounting for regular expenses and income. The goal of this budget is to account for essential and non-essential spending, and then create a reasonable buffer to save for future needs.

Revenue

Any income counts as revenue, including income from wages, tips, and gifts.

Expenses

Any costs count as expenses, including rent, debt payments, and bills.

Wants & Needs

It is useful to group spending into two rough categories - wants and needs. Your "needs" are essential, while your "wants" are discretionary.

Some common needs are:

Housing
Insurance
Utilities
Transportation
Food
Debt Payments

Some common wants are:

Entertainment
Decorative Items
Gym & Fitness Memberships

The Gray Area

Many things fall under both the wants and needs category. Clothing is a good example of an item that falls under this area. We all need clothing, but we don't need designer garments and suits.

When budgeting, you can categorize the price of an inexpensive model of an item as a "needs" expense, and then all extra costs under the "wants" category. For instance, consider a scenario where a dress shirt costs $65, while a regular T-shirt costs $10. $10 of this expense could fall under the "needs" category, while the remaining $55 could fall under the "wants" category.

The same process applies to all other deluxe items, like high-end electronics, appliances, and restaurant food.

Savings

The net or "buffer" of your budget can be devoted to savings. What constitutes a reasonable amount of savings varies depending on your personal goals and financial situation. Someone who must save for retirement alone should devote a greater percentage of their income towards savings than someone else with a pension, for example.

The 50/30/20 Rule

The 50/30/20 rule is a traditionally used ratio for budgeting, where 50% of your income is devoted to needs, 30% is devoted to wants, and 20% is devoted to savings.

This rule, however, is not realistic or advisable for everyone. This budget is infeasible for the majority of Americans*, particularly for those who live in expensive areas on a limited income.

On the flip side, this ratio can also encourage wasteful spending among high-income households. If you make $400,000 annually, should you spend $120,000 on non-essentials when you could invest or save this money?

For the reasons above, we instead recommend that you calculate an appropriate portion of your income to save, and then spend the remainder as you please on either wants or needs. Use our savings calculator to determine how much to save for a given goal amount.

You can calculate the right amount to spend on savings, wants, and needs by conducting research yourself, or by hiring a financial advisor. Financial advisors can help you allocate money with expert, personalized advice, and are almost always worth their price - they save you more money than they charge for their services.