What are the key components of successful budgeting?

The key components of successful budgeting include setting budget goals, calculating your income, and tracking and prioritizing expenses. You should also build an emergency fund, manage your debt, put money away for long-term savings, and regularly review your budget.

8 Key Components of Successful Budgeting

1. Setting budget goals

You should have clear objectives you want to accomplish when you make a budget. These objectives can keep you motivated so you want to stick with your budget. You can set budget goals by determining what you value most and what you want to accomplish in the future, then considering how you can use your financial resources to make those things happen.

Some examples of goals you can include in your budget are:

• Building an emergency fund
• Putting away money for retirement
• Saving for a down payment on a home
• Paying off debt
• Saving for a new car

2. Calculating your income

Knowing how much money you have available to spend is an important part of budgeting. Not determining exactly how much money you have coming in can cause you to spend more money than you can afford to pay back.

To calculate your income, add up all your sources of income, such as the post-tax amount from your paychecks, alimony payments, and payments you receive from the government like disability and Social Security. If your income changes from month to month, take the average of the past three to six months.

3. Tracking your expenses

Tracking your expenses lets you know what you’re spending your money on and how much you’re spending. It also gives you insight into whether you’re spending more money in a particular category than you should.

You can track your expenses manually by looking at bank and credit card statements. But 15% of people say the biggest challenge they face when budgeting is having too many expenses to keep track of, according to a WalletHub survey. A budget app, like the WalletHub app, lets you sync your financial accounts to have your expenses tracked automatically, so you don’t have to spend time manually tracking them yourself.

4. Prioritizing necessary expenses

Prioritizing your most important expenses while budgeting allows you to make sure you set aside enough money to cover these costs. It can also help you identify lower-priority expenses that you can eliminate or reduce spending on if you need to.

Your essential expenses are often called your “needs,” and these are expenses that you cannot do without. The things you like spending money on but are not essential are called your “wants.” Your needs should always be prioritized over your wants.

Examples of Needs

• Rent or mortgage payment
• Groceries
• Utility bills
• Transportation
• Insurance and health care
• Minimum payments on credit cards and loans

Examples of Wants

• Dining out
• Vacations
• Streaming services
• Sporting events, movies or concerts
• Unnecessary jewelry, clothing, or accessories

5. Building an emergency fund

A successful budget should allocate a portion of your income to an emergency fund, if you don’t already have one. Your emergency fund should have at least three to six months’ worth of your living expenses, according to financial experts.

Having an emergency fund is an important part of budgeting since it can prevent you from using funds you have allocated to other items in your budget when you have to cover unexpected expenses, such as an expensive home or car repair bill.  Nearly half of the respondents in our emergency savings survey said they are not confident they can cover an unexpected expense.

6. Managing debt

About 2 in 5 people say they are struggling with debt, according to a WalletHub survey. When you have a lot of debt, it can be difficult to save money for the future. The interest can eat away at your savings, preventing you from reaching your financial goals. However, when you include debt payments in your budget, you can come up with a plan to pay off your debts faster and free up more money in your budget that you can then allocate to your goals.

7. Putting away funds for long-term savings

You shouldn’t just think about how your money will be used for this month or the next couple of months, but also how you will pay for major expenses in the distant future. An important element of budgeting is earmarking funds for long-term goals, such as covering expenses during retirement or paying for your kids’ college education. This can help make sure you have financial stability in the future.

8. Reviewing your budget

Reviewing your budget weekly or monthly allows you to monitor your progress toward your goals and make sure you are staying within your budget. It also gives you the opportunity to adjust your budget to account for any changes in your income, spending or financial goals. A budget will not be successful or useful if you do not adapt it to your current financial situation.

To learn more, check out WalletHub’s guide on how to make a budget.