How do you build a budget? | Budgeting | Financial Literacy | Khan Academy

In this video, I'm going to show an example of what a budget could look like and how you might want to modify that budget depending on your goals, your wants, your needs, and what you want to save for.

So, I'm going to do it on a spreadsheet, but you could do a budget on a piece of paper. There are going to be tools that you could find online that can also help you set and keep track of a budget. But just on the spreadsheet here, the first thing I start out with is my after-tax income because that's the actual amount of money that I have to spend in a given month.

I'm going to do everything here on a monthly basis. So, whatever my income was, I'm paying for taxes and other things that get withheld from my paycheck, and my after-tax is right here: three thousand dollars. Now, how can you find that out for yourself? You could see that in your pay stub. You could also look in your bank account if either you're depositing your pay stubs or you're getting direct deposit. This is the amount that actually is getting deposited in your account every month. If you're getting paid, let's say, twice a month, and you'd want to add those two up for the month.

Now, let's think about the needs, the wants, and savings. Now, as we talk about in the introduction video, needs are things that you know you need. A place to live, you need electricity and water and heating. You probably need some form of transportation; you need car insurance. Maybe there's other forms of insurance. You need to eat; that's where the groceries come into play. You probably need to communicate with folks; you probably need the Internet, maybe to do your job or just to basically function in some way.

So, for this budget here, I've listed all of the need expenses, and they total to 1780 dollars per month. Now, you already see something interesting going on here. If you take 1780 and divide it by three thousand dollars, you get that it is 59% of this three thousand dollars. So, already we are violating the 50-30-20 rule. So, we're going to look at that a little bit more, but let's just think about where this budget is right now, and then we can think about how we can tweak it to get closer to the 50-30-20 target.

Now, this next column here is our wants; these are things that are nice to have. So, for example, you don't have to go to a restaurant in order to survive. You do have to get groceries. Eating out at a restaurant, as we know, is more expensive than getting groceries in most cases, so we'll put that as a want.

So, 460 dollars of eating out, gym membership – these can be very important, but you don't have to have a gym membership. Going out entertainment, this might be your streaming services. You know that you don't necessarily need to watch these things. This is another form of entertainment, but some of us, you know, we feel like we deserve this type of thing.

And then I put fancy clothes here because you probably do need some clothes, but for a lot of us, there might be above and beyond fancy clothes or things that we might not absolutely need that I listed here. All of that combined is 795 dollars, and we're actually doing pretty good on the 50-30-20 rule right over here, where right now our wants are below that 30 percent.

And then the savings are just what happens when you take three thousand dollars, subtract 1780 of needs, and subtract 795 dollars of wants, and that's what we are left with. But we see that our savings are not where we want it to be; it's not at that twenty percent. And why is that? Well, because we're overspending on needs right over here.

If we really wanted to meet the 50-30-20 rule – and this is just a rule of thumb; obviously, it doesn't have to be exactly that – we would be spending fifteen hundred dollars on needs, nine hundred dollars on wants, and six hundred dollars is what we would have saved.

So, let's say you're this person, and you're like, "Okay, I really want to get to that 50-30-20 rule." Well, maybe I can rent a slightly smaller apartment. So, maybe I can find another apartment that costs a little bit less. Maybe I can find a cheaper cell phone plan – well, maybe that doesn't get a lot cheaper. I'm still not quite there.

Maybe I could get a cheaper car; maybe I get a used car of some kind. So, maybe something like that. I can economize on my utilities a bit, and I'm almost there. And maybe I don't need the fancier stuff. Maybe even while I'm doing my groceries, I'm doing a little bit a few more wants and needs even in that grocery.

And this, for example, would be a budget that definitely gets you closer to that 50-30-20. In fact, now we're under budget on needs, we're under budget on wants, and now because of that, we are saving more than that 20 percent.

Now, this is not a bad thing as long as you are living in a sustainable way and you're getting your needs, and we all deserve some of those wants. It's good to save even more than that 20. It also shouldn't be a source of stress if maybe the numbers are a little bit lower than 20 in one month or another.

The important thing is that you're thinking about this, that you're taking your information, for example, from your pay stub, you're looking up the information on your bank account or your credit card statements to figure out all of these payments right over here, so that you have a good sense of how much you're spending on needs, how much you're spending on wants, and how much you're spending on savings.

I'll tell you, if you just go through this exercise, you will be surprised. I encourage you to think before you do the math where you think you're spending your money, and then after you do the math, see where you're spending the money. And that's just going to make you that much more conscientious and give you pretty good clues of how you might want to modify your lifestyle in one way or another.