How to create a budget in 6 easy steps : Life Kit Whether you're paying down credit cards or saving for daily necessities, the best place to start is with a budget. Some simple tools can help.

How to spend less money, starting with a budget

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Budgeting - that word alone - I mean, it sounds awful, right? - keeping track of everything you spend money on, joyless spreadsheets. Oh, hang on, guys. I just got to enter this beer and my share of the nachos into my budget app. I mean, who wants to deal with that? But if it's such a drag though, why are some of you talking about budgeting like this?


UNIDENTIFIED PERSON #1: I have had such a positive experience budgeting recently.

UNIDENTIFIED PERSON #2: And I am budgeting wizzard.

UNIDENTIFIED PERSON #3: I'm actually super jazzed about it. It's, like, all I want to talk about.

ARNOLD: A budgeting wizard, I love that guy. Super jazzed, all they want to talk about - what is going on with these people? What is their secret? This is your NPR LIFE KIT. This episode, budgeting - we're going to figure out how to join this party, how to convert a dreary, anxiety-producing, emotionally-fraught task into something conquerable, empowering and maybe even fun. We're going to learn how right after this.


ARNOLD: I'm Chris Arnold, and I cover personal finance for NPR. And in this episode, we're going to give you six tips for setting up and sticking to your budget. And our first big takeaway - call it tip number one - you need a goal. But it can't just be any goal - right? - because, I mean, you want to stick with this. You want to be a budgeting wizard. You need motivation. This is going to be fun. It can't be just any goal.

KRISTIN WONG: It has to be something that's specific and meaningful to you.

ARNOLD: That's Kristin Wong. She's written a book called "Get Money." And she writes about personal finance for Lifehacker and other publications. And she says, you don't want to try to start a budget just because you think it's something that you should do.

WONG: If you just have, like, a vague goal - like, oh, well, I mean, I need to be an adult. I need to be a responsible grown-up. You know, I think most of us when we start budgeting or start wanting to get our finances in order, that's the goal - the best goal that we come up, you know. Like, it's time to be an adult. And it's just not a goal that really serves us because it doesn't really mean anything. And, I mean, also who wants to be a responsible adult? (Laughter) That just doesn't sound fun.

ARNOLD: Deep down, that's not really what we want.


ARNOLD: Kristin says, pick a goal that actually is something that you really, really want.

WONG: Like, maybe you want to get out of $10,000, $20,000 worth of student loan debt. Maybe you want to save up $3,000 for a trip to South America. Then on a Friday night, where you have nothing else to do, and your friends say, hey, let's go to this hip new restaurant. You know it's going to be 50 bucks, but you don't really have a good reason to say no except that, you know, this budget tells you not to. But when you have a goal like, OK, I want to save $3,000 for a trip to South America, well, now you have a reason to say no to that $50 dinner because you have something to say yes to now.


ARNOLD: OK. So a trip to South America is fun and exciting. But, of course, a lot of times what gets us serious about wanting to make a budget is that we're not having fun. There is, like, a moment of crisis or a huge life shift. This is our next takeaway - tip number two - if you are freaking out about money, harness the freakout.

JESSICA FISHER: My water broke, and we had quite the experience.

ARNOLD: That's Jessica Fisher (ph). She was on her way to the hospital, in labor obviously. And you know the scene - contractions, everybody's getting anxious. It probably didn't help that her husband pulled the car over to buy a burrito on the way to the hospital before they finally got there.

FISHER: I started having contractions, you know, pretty frequently with not a lot of time in between them. And Ryan's sitting there eating his Chipotle and kind of making me mad. So I flipped to my phone.

ARNOLD: And Jessica's feeling like, OK, we're having this baby. This is going to cost money - child care, someday college. I mean, burrito guy here is not looking terribly full of answers at the moment.

FISHER: I was trying to not feel the contractions as bad, so I'm scrolling through Facebook in between contractions. And I see a post about a budgeting program, and it said it was on sale. It hit me right at that moment that this is what we need to do. This is what's going to make everything work. And I pass the phone to my husband. I said figure out how to buy this budgeting program. That kind of, you know, calmed me down a little bit because I really, you know, had started panicking about what we were going to do with three kids when we brought my youngest daughter home.

JESSE MECHAM: I'll have to meet this woman at some point. (Laughter) That blows my mind.

ARNOLD: That's Jesse Mecham. And that budgeting program that Jessica bought, he invented it. It's called You Need A Budget, or YNAB for short. And we should say the company's been a sponsor of NPR before. But we're talking to Jesse because YNAB has this vast community of loyal users - like, hundreds of thousands of people. And Jesse's interviewed a bunch of them, and it turns out, a lot of them are kind of like Jessica, having her baby and freaking out about money.

MECHAM: Or they had decided they were going to move. Or the breadwinner lost a job. I think those moments where you have the willpower or you have the energy or whatever it is, you have this motivation, that motivation is fleeting.

ARNOLD: It might be getting out of college and having to start paying student loans and feeling like, uh-oh, I've got to figure this out. But whatever it is, Jesse says harness that freakout. You have an impulse to knuckle down and get started and do it. And as you do it - and he says this is important - forget everything that you think you know about what making a budget is actually going to be like.

MECHAM: I mean, the first image that comes to most people's mind is either dieting or imprisonment. And what we try and get people to think is budgeting's not about being handcuffed. It's really about being liberated to start to decide what you want to do instead of just reacting to everything that comes your way. And so it's not about saying, hey, don't spend here, don't spend there, cut back on this. Never eat out. None of that. It's just about saying, what do you really want?


ARNOLD: So those are our first two tips - what's your specific goal, the thing you really want? And use your angst for motivation. And we're talking to Jesse from YNAB, but there's also all kinds of other tools and apps out there. Mint is really popular. We've got a link to a free, simple spreadsheet you can use at And, look. If you're still like, budgeting, that's going to be a drag, I don't know, Jesse says, look, getting started can be pretty painless. And at first, all you want to do is just track where the money is going and kind of see what's going on. And he says sometimes it's best if you don't try to change too much, too fast.

MECHAM: Especially don't cut back right away. You know, you're just getting started. You have someone that's been spending, I don't know, $1,200 a month on groceries, and then they come in and they say, we'll spend $500 'cause we're really serious. That's a recipe for disaster. You know, don't go zealot on me too quickly.

ARNOLD: OK. So now, though, it is time to take out and sharpen your pencil.

WONG: Then, you know, comes the dirty work of actually putting together the budget and deciding how your income gets divvied up among different categories.


ARNOLD: And Kristin says there's a good rule of thumb here that a lot of experts talk about. This is tip No. 3. We've got some numbers coming up here, but it's going to be OK. It's not that complicated. It's called 50-30-20. And Elizabeth Warren actually used to talk about this back when she was a Harvard professor and she was looking into the pressures that middle-class families face. And, all right, it's called 50-30-20. Here's how it works.

WONG: It goes like this. Fifty percent of your after-tax, take-home income should go toward basic living necessities, like your rent, like your groceries, like your utility bill.

ARNOLD: So that's easy. Half your income for the big fixed costs in life.

WONG: And then 30 percent should go toward discretionary expenses - things that you don't necessarily need but you want, like your Netflix subscription, restaurant spending. You know, clothing, makeup. Stuff like that.

ARNOLD: And then that last part, the 20 percent that's left over...

WONG: Should go toward savings and debt goals.

ARNOLD: And these are guidelines, a good place to start. The saving, of course, is going to be the hardest part for a lot of people. That is very tough, especially when you're not making that much money. But we have a whole episode just on how to save more money. There's a lot of good, high-value information in there. So check that out. But with this 50-30-20 thing, what you're doing here is you're starting to organize and place some limits on your spending.

MECHAM: The budget is, it's a tool to manufacture scarcity regularly.

ARNOLD: And like Jesse was saying, this is the part that people think is going to feel like handcuffs. But he says that pinch, that scarcity, that's actually really powerful. I mean, you could kind of think about like this. Like, remember when you were a kid and all you had was that $5 or $10 allowance, or money from babysitting or mowing lawns or whatever? You were probably pretty careful about how you spent that money because once you did, it was gone.

MECHAM: This moment that we never experienced now, where you end up with zero dollars or really, really close to it. We've eliminated this scarcity because banks have introduced very profitable mechanisms to have you just walk past zero and overdraft a little bit and pay them a fee. Or you can just, if you run out of money in your checking account, you just swipe your credit card and you've walked past zero again. We've gotten really used to the idea that we never really run out of money.

ARNOLD: So Jesse says this is the whole point of the budget, to get back to a world where we do run out of money, to feel that scarcity. And this is tip No. 4. You want to make the power of scarcity work for you.


ARNOLD: So if your budget says $800 for groceries this month or $50 for coffee - whatever it is - that is way better than just looking at what's in your checking account.

MECHAM: Absolutely, if, yeah, you never look at your checking account balance to see if you can spend anything. Because that's a big pile of money or small pile, whatever it may be. But it's a pile that doesn't tell you any information at all. All it tells you is what your checking account balance is. But it doesn't tell you if half of that money is reserved to pay a large bill that's coming up, and a little bit that's left over is to pay a preschool tuition and then you've got some left to pay the lights. And you're sitting there wondering if you should buy boots, you know? It shouldn't even be in the equation.

So the moment I know someone's really got it is when they'll tell me, Jesse, I went to look to see if we should go out to eat, and we only had, you know, $20 in our restaurants category so we decided to get some pizzas instead. I felt broke. That phrase is great. They'll say, I feel broke because I can't go out to eat where I want to go out to eat at this moment, but my checking account has never been bigger. And that is where I say, OK, this person got it. They're manufacturing scarcity around the priority of how much should we spend on restaurants. But on the flip side, they've got money set aside to go on some great vacation where they'll get to enjoy themselves, guilt-free.


ARNOLD: Jesse says a key part of that story about the pizza is that you have to actively look at your budget as you go throughout the month so it can help you make decisions. Also you definitely want to have different categories in your budget but, Jesse says, don't go overboard. Like, does toothpaste go under health care? Or maybe under groceries? I know. Maybe I need, like, a hygiene category.

MECHAM: And I'd say, whoa, whoa. (Laughter) You know? Whoa. Do you ever make a decision based on the information you are collecting? And if the answer is no, don't collect that information anymore.

ARNOLD: But you are going to get some useful information as you go through and make your budget. And all of a sudden, as you're tracking your spending and you're seeing where all the money's going, Kristin says you want to go through, kind of like, a brushfire or doing some weeding and just get rid of stuff. I mean subscriptions, a magazine you don't read, some online service you signed up for that you just don't use.

WONG: You know, my big one is candles from Target. I don't know why I love spending, I just - (laughter) like, the amount of money I spend on candles, yeah, is so stupid.

ARNOLD: Jesse says everybody he talks to cuts back on one thing, for sure - going out to eat.

MECHAM: Not one - not one - has ever said, well, we kept eating out at the same level, and we found our savings somewhere else. Every one of them cuts their eating out dramatically.

ARNOLD: And now we're getting into our next big idea here. You want to go after the big stuff, too, and not just the little pick-me-up purchases and candles at Target.

WONG: Where are you going to get the most bang for your buck when it comes to cutting back? If you look at the areas where you spend the most money - and think about, like, your rent, your housing, your food, transportation - those are, I think, the three biggest areas most of us spend money on. If you tackle - if you make one decision to cut back on any one of those areas, it's going to save you so much more money and time and energy than trying to cut back on coffee every day or avocado toast every week. Sometimes if you get a roommate or move to a cheaper place, those major decisions are going to save you so much more money. They're harder decisions to make, obviously. But they give you more bang for your buck.


ARNOLD: This is our next big takeaway here, tip No. 5. A roommate is worth a thousand cups of coffee. Or actually, maybe more, right? If you live in a city, a roommate could be $15,000 a year in money to help you pay your rent or your mortgage. And Kristin has walked the walk here.

WONG: You know, I was one of those millennials that boomeranged (laughter) and moved back in with my mom when I was paying my student loan. I paid it off so much faster, and I saved so much money. And I'm very lucky. My mom doesn't charge me rent. We come from this culture where my mom would still have me living at home, if she could. But, you know, it's just, sometimes you have to give up what you think life should look like to think about what it could look like.

ARNOLD: And sure, I mean, moving in with her mom was kind of a bummer in her mid-20s, but...

WONG: Sometimes I do miss those, you know, Friday nights where we'd just sit at home, the two of us, and watch "What Not To Wear" and eat takeout. And, you know, I think about those memories now fondly. It wasn't that bad. It worked in my favor, and I was able to get out of debt and then focus on my career.


ARNOLD: When it comes to exactly how you organize and structure your budget, you can do this lots of different ways, right? I mean, super-detailed with a spreadsheet or a budgeting app with lots of categories, or you can keep it a lot more simple. We heard from a listener, Wendy Spitzer (ph), in North Carolina. And she's got a budgeting system that she calls week money, as in how much money she's going to spend this week.

WENDY SPITZER: And in week money, every Friday, I take out an allotted amount of money from an ATM, and that money has to cover all daily living expenses for the upcoming week. So that would include needs like groceries, or gas for your car, transportation, as well as anything for fun money you might use in the course of the week.

ARNOLD: Bigger expenses, like rent, car payments, utilities, that's not part of this. But everything else, she lumps into basically one big, simple category of money that she can spend this week. And if she makes an online purchase, she'll take the cash out of her wallet. And then when it's gone, no more eating out, no more impulse buys in the checkout line. And with this budget system, over time, Wendy has saved a lot of money. I mean, she has a very modest salary, and she was able to buy her own house.

SPITZER: It was, I think, quite shocking to a lot of people I knew because I was living on such little money. But, like, you make a small change. It becomes a habit. You institute or implement that habit for many years. And I have been able to put a down payment for a house, and I have been able to save for retirement. So it's worked really well for me.

ARNOLD: I'm a fan of Wendy's strategy here because it's simple, and I'm not like a super detail-oriented guy when it comes to tracking every single purchase and doing a budget. I mean, look. Planning for retirement - yes, the big stuff - but, you know, the little stuff, it's hard for me. I think it's hard for a lot of people. So this is our last big takeaway - tip number six. You want to try different things and find a budgeting system that works for you. So if you want to keep it simple, keep it simple. And people come up with their own systems all the time. I mean, Jesse's budgeting software YNAB, that evolved from just a spreadsheet that he created on his own to help him and his wife save money when they were still in school. And they just kind of stuck it up there on the Internet and tried to sell it.

MECHAM: It launched as a very embarrassing spreadsheet that I love to look at still and...

ARNOLD: Can you describe the spreadsheet?

MECHAM: I don't want to because it's embarrassing. You know, Excel has so many colors you can choose, and I chose all of them in my first spreadsheet. You know, so it was just - it was a hideous cacophony of color and - but it worked. And it taught me that the tool is - it really plays second fiddle. And the first most important thing is your approach. And the effective thing about the tool that I built was that it forced us to approach our money, thinking about it in a different way.

ARNOLD: Meaning thinking about budgets and money as a way to have the best life that you possibly can - the things that you really want with the money that you have. Whether that's more great vacations or paying off your student loans or saving up to buy a house, this is what makes budgeting feel fun. You get good at this, and it affects your life in a lot of good ways. And so to get there, Jesse says the main thing is look, just get started doing it, like right now, this month.

MECHAM: I mean, life is - if it's not changing or abnormal, you know, we're probably dead or darn close to it. And people will often - they'll say, oh, I'm going to wait - let's wait for a normal month, honey, before we do blah or before we undertake this thing. And there just is no normal month ever.


ARNOLD: OK, so this is doable. We can do this budget thing. To help you remember the most important stuff, here's Kristin and Jesse with the key takeaways. Number one, you need the right kind of goal to help motivate you.

WONG: Make sure that it's specific and meaningful to you.

ARNOLD: Tip number two.

WONG: If you have a big life event that is making you anxious or stressed about money, harness that stress and that anxiety and turn lemons into motivation.

ARNOLD: Tip number three, a good place to get started with your budget...

WONG: Is the 50-30-20 method - 50 percent of your take-home income goes toward basic living necessities, 30 percent goes toward discretionary expenses, your wants, and 20 percent goes toward saving and debt goals.

ARNOLD: And tip number four - this is my favorite kind of big concept - use the power of scarcity.

MECHAM: Don't view scarcity as a negative. Use the power of scarcity to help flesh out your true priorities. And don't think of budgeting as handcuffs. Think of it as freedom.

ARNOLD: Number five.

WONG: A roommate is worth 1,000 cups of coffee.

ARNOLD: And our last one, number six.

MECHAM: At the end of the day, you want to try different things and find out what works for you.


ARNOLD: So there you go, everything you need to know about budgeting. Make sure to check out our other LIFE KIT guides at And while you're there, subscribe to our newsletter, so you don't miss anything. We've got more podcasts coming out every month on all sorts of topics. Also check out NPR's Your Money And Your Life Facebook group. We have thousands of people in there - tens of thousands of people in there with questions and answers on all kinds of personal finance issues. As always, here's an otherwise totally unrelated life tip, this time from NPR producer Jared Gair.

JARED GAIR, BYLINE: When using the microwave, instead of nuking the food at 100 percent power, try setting it at a lower power setting for a longer amount of time. This results in more even heating and better tasting food.

ARNOLD: If you've got a tip or you want to suggest a topic, we want to hear it. Email us at Life Kit is produced by the fabulous Sylvie Douglis, Alissa Escarce, and Chloee Weiner. Meghan Keane is the managing producer. Our music is by Nick DePrey and Brian Gearhart (ph). Our project manager is Mathilde Piard. Neal Carruth is our general manager of podcasts and the senior vice president of programming. The woman at the absolute top of the pyramid - Anya Grundmann. I'm Chris Arnold. Thanks for listening.


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