Budgeting math is all about managing your income and expenses to ensure you live within your means and achieve financial goals. Here’s a step-by-step guide with key formulas and examples:
Start by calculating your total income for a set period (monthly, bi-weekly, etc.). Include all sources like:
- Salary or wages (after taxes)
- Freelance or side gig earnings
- Passive income (investments, rental income)
Formula:
Total Income = Main Income + Additional Income Sources
Example:
- Main Job: $3,000/month
- Freelance Work: $500/month
- Total Income = $3,000 + $500 = $3,500
List your fixed and variable expenses.
Example:
- Fixed Expenses = $2,000 (rent, bills, insurance)
- Variable Expenses = $1,000 (groceries, entertainment, gas)
- Total Expenses = $2,000 + $1,000 = $3,000
Set a goal to save a portion of your income, such as 20% of your total earnings.
Formula:
Savings Goal = Income × Savings %
Example:
- Income = $3,500
- Savings Goal = $3,500 × 0.20 = $700
Disposable income is what’s left after paying expenses and saving.
Formula:
Disposable Income = Income - (Expenses + Savings)
Example:
- Income = $3,500
- Expenses = $3,000
- Savings = $700
- Disposable Income = $3,500 - ($3,000 + $700) = $-200 (Adjust budget if negative!)
A simple budgeting framework divides your income:
- 50% for Needs: Rent, groceries, bills.
- 30% for Wants: Entertainment, dining, shopping.
- 20% for Savings/Paying Off Debt
Example (on $3,500 income):
- Needs = $3,500 × 0.50 = $1,750
- Wants = $3,500 × 0.30 = $1,050
- Savings = $3,500 × 0.20 = $700
If you have debt, allocate a portion of your budget to pay it off quickly:
- Focus on high-interest debt first (credit cards).
- Consider the Debt Snowball Method (small debts first) or Avalanche Method (high-interest first).
Formula:
Debt Payment = Income × Debt %
Example:
- Income = $3,500
- Debt Payment = $3,500 × 0.15 = $525
Build an emergency fund of 3–6 months of expenses for unexpected situations.
Formula:
Emergency Fund Target = Monthly Expenses × 3–6
Example:
- Monthly Expenses = $3,000
- Emergency Fund = $3,000 × 3 = $9,000
Track spending regularly and make changes if:
- Expenses exceed income.
- You’re not saving enough.
- Unexpected costs arise.
Use tools like spreadsheets, budgeting apps, or journals to stay organized.