Income, expenses and two simple methods

Start with take-home pay

Your gross pay is what you earn before deductions. Your take-home pay, also called net pay, is what actually reaches your bank account after income tax and other payroll deductions. Always build your budget on take-home pay.

If your income changes from month to month, base your budget on a lower-than-average month. Anything extra becomes a bonus you can save.

Three types of expenses

Fixed expenses

About the same every month: rent, phone plan, insurance and loan payments.

Variable expenses

Change from month to month: groceries, transportation, eating out and entertainment.

Occasional expenses

Don't happen every month but are predictable: gifts, yearly subscriptions and car maintenance. Divide the yearly cost by 12 and set that amount aside each month.

It also helps to sort spending into needs, things you must pay for like housing and food, and wants, things that make life better but could be cut back.

Method 1: the 50/30/20 guideline

This popular starting point divides take-home pay three ways:

It's a guideline, not a rule. In high-cost cities, housing alone can take more than half of someone's income. If your needs are above 50%, try to protect your savings and trim wants first.

Method 2: zero-based budgeting

With a zero-based budget, you give every dollar a job before the month begins. Income minus planned spending minus planned saving should equal exactly zero, so nothing is left unassigned.

Pay yourself first

Move money into savings as soon as you're paid, instead of saving whatever is left at the end of the month. Many banks let you set up an automatic transfer on payday.

Build an emergency fund

An emergency fund covers surprises like a car repair or a gap between jobs. Start with a small target, such as $500 or $1,000, then build toward three to six months of essential expenses over time.