When Should You Start a Budget?

If you're one of the many Americans who don't have a budget, why not start now?

A budget is a plan for where your money goes every month. Essentially, it involves tracking your income and expenses to make sure every dollar is accounted for. In whatever form it takes, a budget helps you maintain or adjust your financial habits so you can achieve goals such as paying your bills on time, buying a house or stashing money for retirement.

The best time to start budgeting is as soon as you possibly can. Read on to learn how to start a budget and which budgeting method might work best for you.

Envelope Method

Envelopes aren't just for mailing bills. They can also help you create a budget so you can pay those bills.

With the envelope method, you divide money into separate spending categories, such as housing expenses and credit card bills. You then write the name of each category on the front of an envelope, and tuck enough cash into that envelope to pay the monthly expenses for that category. For instance, you might put $1,200 in the housing envelope and $500 in the credit card envelope every month.

Once the cash in a certain envelope is gone, you've tapped out your monthly pool of money for that category. You can, though, grab money from another envelope and put it into the empty envelope. That, of course, means you'll have less money to spend in the envelope you borrowed from.

This budgeting method might be a little too old-school for those who no longer use cash, but the same theory can be put to work by simply tracking expenses you've made with a debit or credit card. Keep your expenses in a spreadsheet or on a piece of paper; when you've reached your limit with one category, reduce your budget for another category just like you'd take cash out of another envelope.

Two-Account Plan

The two-account plan requires a bit of simple math.

When you adopt this plan, you add up your fixed, or necessary, monthly expenses—like rent, utilities and groceries—and divide that total by the number of paychecks you get every month. Then, you put the amount for those fixed monthly expenses into one bank account when you receive your paychecks, and put the rest of the money into a second bank account earmarked for discretionary spending (spending on things other than basic necessities). Discretionary spending categories might include entertainment, clothing, eating out and the like.

Here's an example: If your necessary monthly expenses add up to $2,000 and you receive two paychecks each month, you'll deposit $1,000 of each paycheck into the account designated for necessary expenses and the remainder in the account for discretionary spending.

Monitoring the first account should be fairly easy, since your necessary expenses won't change much from month to month. If you lump your savings for retirement and emergency expenses as well as payments used to pay off debts into the account for necessary expenses, then you're able to pretty freely spend the cash in the account designated for discretionary spending (within reason, of course).

The two-account plan is ideal if you use only cash and your debit card for purchases. That's because you can more easily stay on top of how much money you have available to spend. But if you pull out your credit cards even occasionally, you might exceed the amount available in the account for discretionary spending, which then can contribute to your debt load.

Zero-Based Budgeting

You don't need to be an accountant to understand the zero-based budgeting strategy. While zero-based budgeting may sound complicated, it's actually a basic concept.

Zero-based budgeting simply means you account for every penny of the income you bring in every month, specifically categorizing how you'll spend your money on everything from necessary and discretionary expenses to savings and debt payments. Essentially, you start each month with a fresh budget, since your budget from the previous month will pretty much equally balance out your expenses and income to arrive at zero.

As with the envelope method, the zero-based budgeting approach lets you move money from one bucket to offset overspending in another, or reward yourself by putting whatever you don't spend on your discretionary expenses toward your savings or debt payments.

Keep in mind that the zero-based budgeting method demands attention to detail. There's just not much room for error, so you might not want to embrace this method until you've gotten comfortable with budgeting. However, zero-based budgeting does provide a clear overview of your spending, enabling you to make smarter money moves. This method is best if you have a set monthly income and fairly predictable expenses.

If you adopt zero-based budgeting, be sure to establish an emergency fund, even a small one, to safeguard yourself if you're hit with a big expense like a medical bill.

50/30/20 Plan

Coming up with a 50/30/20 budget relies on an easy-to-understand formula. Rather than carving out a number of categories for your expenses, you merely assign:

• 50% of your income to basics, like your car payment, rent and utility bills.
• 30% to discretionary spending for nonessential items like movie tickets or restaurant meals.
• 20% to financial priorities, such as saving for retirement and reducing debt.

The 50/30/20 rule isn't strict, though. For instance, you might aim to wipe out your debt, so you could assign 30% to financial priorities and 20% for discretionary spending, and then leave the necessities category at 50%.

If the basics eat up considerably more than 50% of your budget, you may need to adjust your percentages accordingly. If you want to try and keep basic expenses to 50%, you might look for ways to cut your necessary spending, such as moving to a less-expensive apartment or switching from commuting by car to commuting via public transportation.

The Bottom Line

Now is the best time to start a budget. Whichever budgeting method you pick, it should match our unique financial situation and should be the method that you'll be most likely to follow. The envelope method might appeal to one person, while the 50/30/20 method might appeal to another. Just know that a budget works only if you're willing to stick to it, empowering you to achieve your short-term and long-term goals.

If you need help organizing your finances, take a look at Experian's Personal Finances tool, which links to your bank account and gives you a comprehensive overview of your finances and spending. With Experian's free credit monitoring, you can track all your credit accounts to help you determine how much to put toward paying down debt every month.