Financial stress due to inflation? These 5 strategies can help you create a better budget.

• Monitoring your finances closely is an effective way to enhance your financial situation.
• According to the Bureau of Labor Statistics, Americans' most costly budget categories are housing, transportation, and food.
• Until they monitor their expenses and spending, individuals tend to be excessively optimistic about costs.

Despite inflation easing, many Americans continue to experience financial stress due to a combination of factors, including a lack of savings and mounting credit card debt, according to surveys.

To relieve some of your worries, you can earn more income to cover your spending. However, keeping track of your money can also improve your finances. Currently, you may require a better budget.

Billy Hensley, president and CEO of the National Endowment for Financial Education and a member of the CNBC Global Financial Wellness Advisory Board, stated that although creating a budget can be stressful and restrictive, it is crucial in helping you comprehend your spending habits.

How to start building a better budget

Start tracking your spending for the past three months to get a realistic picture of your income and expenses.

Assessing your current situation is always the first step, according to Don Edlin, a certified financial planner and senior financial coach at Financial Finesse, a financial coaching and education company that works with employees at many Fortune 1000 companies, including Comcast, which owns NBCUniversal, the parent company of CNBC.

"Edlin stated that most people are overly optimistic about their budget and set too aggressive goals. As a result, they fail to benchmark their spending, leading to inaccurate budgeting. This creates a negative feeling and makes it unlikely for them to maintain their budgeting habits in the future."

To understand your spending habits, calculate the average of your fixed and variable expenses by reviewing your credit card bills, invoices, and receipts. This will give you a benchmark to assess your spending in various categories and identify areas where you may need to cut back.

Here are five methods to help you improve your budget:

1. A spreadsheet, or just pen and paper

Creating a budget can be effortless by utilizing a free budget spreadsheet online or by drawing a T-chart on paper. Simply fill in the columns in the spreadsheet or draw a line down the middle of a piece of paper and list all your sources of income on the left side and all your liabilities or monthly expenses on the right, including rent/mortgage, car payment, credit card bills, and any other necessary payments.

2. Budgeting apps

Numerous budgeting apps, such as Goodbudget, Monarch Money, Simplifi by Quicken, and You Need A Budget (YNAB), are available for free or at a cost. These apps link to your bank and credit card accounts, automatically tracking your purchases and payments and categorizing spending into various categories (e.g., transportation, food, entertainment) to help you monitor your finances.

3. 'Cash stuffing,' aka the envelope method

The "old school" budgeting technique known as "cash stuffing" is gaining popularity on TikTok. It involves withdrawing your monthly spending money in cash and dividing it into envelopes labeled for each expense, such as groceries and gas.

By using envelopes to manage your finances, you can avoid overspending and accumulating debt. Once you've spent all the cash in one envelope, you'll either have to wait until the next month to spend in that category or borrow from another envelope to make up for the shortfall.

Stashing cash in envelopes not only misses out on the potential for a higher return on investment in a high-yield savings account but also exposes you to the risk of theft. It lacks the security of keeping your money in a federally insured bank or credit union.

4. 50/30/20 rule

The 50/30/20 rule is another widely used budgeting technique. It involves dividing your after-tax income into three equal parts: 50% for necessities such as food, housing, transportation, and minimum debt payments; 30% for discretionary spending; and 20% for savings, including your emergency fund, retirement savings, down payment on a home, and additional debt repayments.

Financial planners suggest that the 50/30/20 method concentrates on what is achievable rather than what is unattainable. Nevertheless, with the increasing costs of housing and vehicles, some individuals, particularly those in the early stages of their careers, may need to increase the percentage of their income allocated to necessities to 60%, depending on their location, and decrease their discretionary spending to 20% - or even less if they lack an emergency fund or aim to accelerate their savings.

5. Reverse budgeting

Another way to prioritize savings is through reverse budgeting, which involves moving income directly into savings accounts before allocating funds for spending. This approach encourages individuals to "pay themselves first" and can help manage planned savings and expenditures.

To achieve your goals, such as an emergency fund, retirement, college savings, or a down payment on a home, consider saving in dedicated accounts. High-yield savings accounts are a good option, or you may put the money in an investment account if you have at least five years to reach your goal.

Pay for your "needs" from a checking account, such as rent/mortgage, groceries, and student loans.

Instead of spending all of your money on "needs," direct any leftover funds to a high-yield savings or separate checking account and use that money for your "wants," such as dining out, traveling or purchasing new clothing.

Avoid common budget-busting mistakes

In 2022, the Bureau of Labor Statistics reported that housing, transportation, and food were the most expensive budget categories for Americans, accounting for a staggering 63% of average household annual spending.

To maximize your budget's effectiveness, prioritize these three budget categories, advised Nick Holeman, a certified financial planner and director of financial planning at Betterment. Avoid getting sidetracked by minor budget items that won't significantly affect your overall budget.

Rewritten sentence: Don't be discouraged if your first budgeting method doesn't work; try different strategies until you find one that works best for you.

""One-size-fits-all approach to budgeting is not suitable as our circumstances change and we must adapt to the variables that impact our well-being," Hensley stated."

Therefore, you may need to be flexible to find the right strategy.

To avoid overspending, it's crucial to save for emergencies and account for irregular expenses.

Holeman recommends building a "sinking fund" for big ticket items.

""By setting aside a small amount each month, you can plan for large, uneven expenses like new tires, vet visits, or Christmas presents without disrupting your budget," he advised."

It's crucial to track expenses and spending from the beginning to avoid being overly optimistic about costs.

Effective communication is crucial for maintaining a budget when sharing expenses with a partner or roommate.

If you struggle to adhere to your budget, allow yourself some leniency, Edlin advised.

"He stated that it was not an accounting exam, and no one would evaluate his budget. It's fine; simply improve next month."