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A line item budget is a detailed look at your income and your expenses, and it can help you manage your money more effectively.

Like any type of budget, the purpose of a line item budget is to help you understand how much money you have flowing in and out every month. It also provides the guidelines and guardrails you may need to avoid overspending and hit your savings goals.

If you’re interested in taking a closer look at your money or are sick of running out of cash before the end of the month, this guide to line item budgeting can help.

What Is a Line Item Budget?

A line item budget is a detailed financial plan that lists your income and then breaks down expenses into categories, or “line items.” It allows you to organize your expenses by grouping related costs together on separate lines to create a comprehensive financial picture

A line item budget also enables you to anticipate costs within each expense category, then closely monitor your spending to ensure you stick to your budget and don’t overspend in any specific area.

What Is Considered a Line Item?

A line item is an income or expense category that is part of your budget. For example, if you’re setting up a personal line item budget, your income line items might include salary and a rental property, while your expense line items might include rent, car insurance, and a music subscription.

If you want to make sure you’re putting some money into your savings account each month, you can even include a savings transfer as a line item in your budget.

It may be helpful to know a bit about how these budgets can work in business, as background for creating your own line item budget. Say a business is creating a new advertising campaign. They might consider:

•   Projected expenses: How much they think the cost of creating and executing their advertising materials will cost in the future.

•   Previous actual expenses: This will show how much in the past their costs actually were for such endeavors.

•   Present-year expenses: This would track the actual expenses being incurred as they create their ads. This could be done week by week or month by month.

Why Line Item Budgets Are Commonly Used

Line item budgets are commonly used because they allow you to account for everything that is flowing in and flowing out of your checking account. This makes it easy to monitor spending and compare actual costs with projected amounts and stay on top of your money.

Businesses, nonprofits, and governments tend to favor line item budgets because they allow an organization to easily identify areas where costs are exceeding expectations, track spending across different departments, and make informed decisions about where to allocate funds most effectively.

What Are the Advantages of Using a Line Item Budget?

If you are considering implementing a line item budget, consider these upsides.

Allocating Expenses Is Simple

One of the biggest pros of using this kind of budget is the ease with which they can be created. With just a few clicks on a spreadsheet, you can establish a basic structure and begin to fill in the data that needs to be recorded. And as priorities change, the budget can be changed just as easily to meet those new needs.

Interpreting the Budget Is Easy

Another major advantage of the line item approach: Making a budget this way isn’t only easy to do, it’s also easy to understand. Creating a basic list of categorized income and expenses doesn’t require any specialized accounting degree to decipher. With your phone’s calculator function, you’re good to go.

Planning Your Future Finances

It provides an easy-to-read, at-a-glance view of what to expect from your expenses in a week’s, month’s, or year’s time. And specific amounts are clearly displayed on each individual line. Those looking for budgeting for beginners tips may want to consider a line item budget for these two benefits. This kind of budget can help you avoid those surprise moments of not understanding why your checking account balance got so low.

Providing Clarity for Financial Decisions

Once a line item budget is in place, it can significantly simplify financial decision-making. Rather than wonder how much you can afford to spend on clothing or take-out, you’ll have a pre-decided spending limit. As long as you don’t exceed your targets, you can enjoy your expenditures without guilt — or running up debt.

What Are Some Downsides to Line Item Budgets?

Next, it’s worthwhile to recognize the possible drawbacks of line item budgets.

Best for Those With Predictable Income and Expenses

Line item budgeting usually relies on fixed and steady income and expenses for accuracy. It can work well for managing predictable finances, but if a budget contains line items that fluctuate significantly, it may not balance properly. This can lead to inaccurate calculations.

Typically Rigid

Another disadvantage of line item budgets is that they are rigid. It’s not uncommon to change spending habits throughout the year to fit changing needs, but those changes aren’t automatically reflected in a line item budget.

Spending adjustments may require extensive budget rewrites in order to accurately capture a new spending plan. With a line budget, any time financial goals change, it requires reviewing and adjusting everything line-by-line in order to stay current.

Requiring Detail

Unlike a budget such as the 50/30/20 rule, in which a person wrangles three big financial buckets (or spending categories), a line item budget does require rigorous accounting of specific expenses. This can be challenging for some people.

Budgeting: Is It Worth It?

Budgeting can seem tedious. After a long day (or week) at work, the last thing you may want to do is spend time in front of a screen, plugging in data and recording how much you’ve spent.

But tracking your money can be a powerful exercise. Here are some reasons why budgeting can be worthwhile:

•   Tracking your spending can give you direct visibility into your habits and when you understand where your money is going, you can feel empowered to make adjustments.

•   Budgeting can be part of a good money mindset. Instead of thinking of budgeting as a series of spending restrictions, you could think of it as a tool you can use. It’s a technique that can give you the freedom to spend money on what is most important to you.

•   Setting money goals can provide a structure to help you build out your budget and plan for the future. So, whether you’re saving for retirement, planning a wedding, or jetting off on a trip overseas, having and sticking to a well-crafted budget can help you get there.

•   It’s also worth noting that your budget is a living document. It’s okay to make changes. As you adjust your goals or experience or experience changes in your income or lifestyle, you can (and should) make adjustments and changes to fit your new needs. Your life isn’t stagnant, and your budget shouldn’t be either.

Using a Line Item Budget for Personal Finance

Typically, line item budgets are used by small businesses to track their earnings and expenses and compare them from year to year. While businesses typically have different needs than households, creating a line item budget can be helpful in personal finances, too.

Just as they give small businesses insight into opportunities to grow the business or reduce expenses, line item budgets can help individuals manage personal expenses. Outlining each source of income and expense can reveal personal spending habits and opportunities to reduce one’s cash outflow.

The specific insights you gather from a line item budget, as well as the changes you make, will ultimately depend on your personal goals and overall financial situation.

Deciding What to Include in a Line Item Budget

Deciding to create a line item budget is just the first step. Next, consider which categories are most important for you to include. A personal budget is just that — personal.

Everyone’s financial situation is different, so this list is not the end-all-be-all solution, but here are some high-level categories you may want to consider (each will likely include several sub-categories).

Bills and Utilities

This category is fairly self explanatory — after all, everyone’s got bills to pay, right? Things worth listing in this category might include water and electricity bills; cable, internet, or phone bills; or any other monthly bill you have on your expense list.

Debt

If you have student loan payments, credit card bills, or other recurring debt payments, include them in your budget. That’s an important area to track.

Education

If you are currently attending school or have kids, you’ll likely want to consider including things like tuition and fees, the cost of books and other supplies, and any other expenses directly related to education costs.

Entertainment

This one is a little broader and can be highly customized depending on personal spending habits. Do you have subscriptions to streaming services? Do you buy lots of books?

Tickets to the movies, museums, or a concert could also be included in this category. Depending on your hobbies and interests, you may find you can expand this with additional detail.

Fees

Think of all the fees charged to your accounts. Late fee on a delayed credit card payment? ATM fees? Add ՚em here. You could add HOA fees and others to this category as well. If you pay an annual fee to your credit card issuer, that goes here as well. (Seeing how fees add up can be a useful exercise. For instance, if you are paying several fees at a traditional bank, you might opt to switch to an online bank, which typically will charge lower or no fees.)

Food

Depending on your eating habits, you could split this up even further in a line item budget into categories like groceries, snacks, and dining out.

Home

Think of things like your rent or mortgage as well as expenses for maintenance and upkeep of your home.

Income

You’ll probably want to include all sources of income, not just your regular 9-to-5. If you’re budgeting as a couple, you can include income for both partners.

Add income earned from having a side hustle or from passive income opportunities, too.

Investments

Add your contributions to all investment accounts including a 401(k), IRA, 529 accounts, or other brokerage accounts.

Medical

Expenses for medications, health, dental, or vision insurance, and copays can all be included under this category.

Personal Care

Things like toiletries, vitamins, and beauty supplies would fit into this category. Hair cuts, trips to the nail salon, and massages could be included as well. If desired, you could also include the cost of other self-care practices, like a subscription to a meditation app, gym membership, or exercise classes.

Savings

Money that you put into an emergency fund, vacation fund, or other form of savings should be accounted for in your line item budget, too.

Recommended: Emergency Fund Calculator

Services

Do you pay for any regular services? You could include things like dry cleaning services, the cost of having a housekeeper, or the fee you pay your babysitter for a night out.

Shopping

Heading to the mall? Shopping expenses like clothing, toys, and even gifts for others, could be added here.

Taxes

If you’re a full-time employee, taxes are automatically being taken out of your paycheck. But if you are a freelancer or independent contractor, note quarterly taxes in your line item budget.

Transportation and Auto

This is a catch-all category for things like your monthly metro pass, gas, car insurance, auto loan payment, and general maintenance of your vehicle (if you own one).

Travel

Add all costs associated with trips you take here. Things like hotels or lodging, air travel, taxis, travel insurance, and tickets and admission for excursions and seeing the sights.

If you’re road-tripping, you could include the cost of gas, tolls, and other car-related expenses for the trip here too. Also worth including is the cost of food while on the road.

Putting Your Line-Item Budget Together

A list this long can seem overwhelming. Take it one step at a time, and, if needed, break the work up over a few days. For instance:

•   On day one, gather all of the relevant documents (tax returns, paychecks, credit card statements, etc.), and create the skeleton of your line item budget.

•   On day two, you could aim to make it through recording your income and maybe half of your expenses.

•   On day three, you could finish adding data about your expenses and add any finishing touches or edits.

After creating this line item budget, you should have a bird’s-eye view of your spending habits. Take a close look at the information, and decide if you are happy with what you see. Now is the time to be honest with yourself and make the changes you feel are necessary. Do you want more money to put towards savings or paying down debt? See how you might alter the numbers as they currently exist for the months ahead.

Want to make cuts to your monthly expenses? Now you know exactly how much money is being spent in each category and where you could stand to hold back. Some ideas to mull over:

•  Can you negotiate less expensive car insurance? Experiment with meal planning to see if you can be intentional about your food spending and potentially cut your grocery bill.

•  Try adjusting the thermostat setting while you’re asleep or away from your home to cut your energy bill.

•  Getting hit with fees on late payments? You might want to add an alert to your calendar or a monthly notification to your phone to remind you when payments are due. Another possible option is to enroll in autopay so you never miss a payment.

Payment history accounts for 35% of your credit score. So making payments on-time consistently could not only eliminate those pesky late fees from your budget but it could also potentially have a positive impact on your credit profile over time.

Recommended: How to Stop Overspending

Tips for Staying Consistent With Your Budget

To make sure you stay consistent with your line item budget, it’s helpful to choose a specific day each month (ideally at the end) to review your expenses. This is when you gather your statements and receipts and log in actual spending and income numbers for each line item.

You can then compare your actual spending to your planned spending, identify areas of overspending, and make any needed adjustments to your budget for the following month to ensure you’re on track with your financial goals.

It’s also helpful to automate your finances wherever possible. Consider setting up auto pay for regular expenses, as well as a monthly transfer from your checking account to a high-yield savings account for emergencies and other short-term savings goals.

Line Item Budget Example

A line item budget example can be as simple as using an Excel or Google Sheets spreadsheet to make your own basic line item budget template.

At the top rows, income can be added, say, for a given month. Then, moving down the page, you can list out the various expenses you have. To the right of that, you might include “projected” and “actual.” If certain line items tend to always come in over budget, you may need to adjust your budget — or your spending habits.

You can customize the organization to best suit your needs.

Line Item Budget Templates

There are many free resources online that can help you set up your budget. For example, Google Sheets offers free pre-made budget templates, such as an annual budget and a monthly budget, that you can customize to your needs.

Excel also offers free pre-made templates for budgeting that includes line items for different income streams and household expenses, with the ability to add or subtract categories to make it fit your financial situation.

Alternatives to a Line Item Budget

Though simple and intuitive in nature, line item budgets aren’t a perfect fit for everyone. Here’s a look at some other budgeting options you might consider.

50/30/20 Budget

Also known as a proportional budget, the 50/30/20 budget rule focuses on splitting income into three buckets — “needs,” “wants,” and “goals” (savings and debt repayment). Instead of creating lists of expenditures, you instead commit to spending 50% of your income on things you need to spend on (housing, food, debt, and similar “musts”), 30% on things you want (dining out, travel, and so forth), and the remaining 20% is set aside for savings and debt payments beyond the minimum.

Because spending isn’t tracked on a granular level, you might use a budgeting or expense-tracking app to help avoid overspending in any one category. You can use an online 50/30/20 budget calculator to see the breakdown of your money.

Envelope Budgeting Method

The envelope method focuses on using physical envelopes and labeling each with a spending category, such as food, bills, or entertainment. The envelopes are then filled with the maximum amount of money desired to be spent in each category, and spending throughout the month happens directly from those envelopes.

Once an envelope is empty, no more spending can be done in that category, unless taken from another. This method can be adapted to use a debit card vs. cash.

Zero-Based Budget

Similar to the line item budget, the zero-based budget takes account of all income and expenses. The difference is that with this budget, the goal is to make sure that every incoming dollar is allocated to either a saving or a spending purpose, and to leave nothing left over. Automating finances with services like automatic bill-pay and prescheduled bank transfers (say, into a high-yield savings account) can help with managing this style of budgeting.

The Takeaway

Creating a line item budget can be useful when determining your spending habits. It’s a fairly simple, detailed, and well-organized way to track your earnings and spending, but it’s not always flexible. Also, if you don’t have your budget spreadsheet on hand, it could be more difficult to make changes or check in while you’re busy living.

There are many different types of budgets and as well as apps and expense trackers that can simplify money management. A good place to start your journey is seeing what tools your bank offers.

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FAQ

What is an example of a line item budget?

A line item budget is a simple, organized way of listing income and spending in detail so you can keep things in balance and see how you are tracking over time. It can be easily made with a basic spreadsheet template, listing your income, your spending, and your savings in a given time frame, such as one month.

What is the difference between a line item budget and a program budget?

Line item budgets and program budgets are frequently used in business. Typically, a line item budget will list out individual budget expenses, item by item. In a program budget, however, the spending tends to be grouped into smaller budgets for specific activities or programs. For instance, in a program budget, all the costs related to advertising a new service could be kept together, to show the expenses required to meet that goal.

How do I create a line item budget in Excel?

One simple way to make a line item budget in Excel is to create vertical columns for each month. Starting at the top of each month, you could list various sources of income. Then below that, you could break out, line by line, all of your expenses, such as food, housing, utilities, entertainment, clothing, dining out, travel, transportation, and so on, going down the page. This can allow you to tally your earning, spending, and saving.

What tools can help manage a line item budget?

There are a number of online tools and apps that can help you set up and stick with a line item budget. For example, you might start by using spreadsheet software like Microsoft Excel or Google Sheets to set up your budget, either from scratch or using one of their free line item budget templates. To help stay on track, consider downloading a budgeting app to your phone (your bank may offer a free one) that can link to your outside accounts and help you monitor and categorize your spending.

What are the most common mistakes when using a line item budget?

One of the most common mistakes when using a line item budget is failing to update it regularly. Once you set up your expense categories and spending targets, it’s important to enter your actual expenses to see if you’re staying on track with your budget.
Other common errors with line item budgeting include: underestimating expenses, setting unrealistic spending limits, and ignoring small but recurring expenses.

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Many people aren’t quite sure where their cash goes. They know they have money flowing in and out but couldn’t tell you the details. If you’re among that group, it can be a good thing to start tracking your monthly expenses.

Why bother? Once you know where your money is going, you can decide if this is actually where you want your money to go. You may find places where you’re wasting money and decide to rejigger your spending so you can put more money towards your goals, whether that’s paying down debt, going on vacation, or being able to retire one day.

If you’re ready to learn how to keep track of expenses, these tips can help.

Check out our Money Management Guide.

This article is from SoFi’s guide on how to manage your money, where you can learn basic money management tips and strategies.

6 Ways to Track Your Monthly Expenses

Getting a handle on your spending is easier than you think. Here’s how.

1. Understanding Your Income and Fixed Costs

To determine how much money is flowing into your checking account each month and exactly where that money is going, you’ll need to gather the last six months’ worth of financial statements.

Use these statements to determine your average monthly income (after taxes are taken out), as well as make a list of your regular, or fixed, expenses (such as rent or mortgage, utilities, and car payments). Next, list out your variable expenses — those change from month to month, such as groceries, gas, and entertainment. This is an area where you might find opportunities to cut back.

2. Categorize Spending and Expenses

Once you have an idea of where your money is currently going, you’ll want to put your expenses into categories. This could be a long detailed list. Or, you might simply divide your expenses into three main buckets: Essential spending (“needs”), nonessential spending (“wants”), and saving and paying down debt (“goals”). This approach is known as the 50/30/20 budget.

Needs

Needs include anything that you have to spend money on to maintain a basic standard of living. Using the 50/30/20 budget, 50% of your budget would go to needs.

Examples of needs include:

•  Housing

•  Utilities

•  Food

•  Healthcare

•  Insurance

This category can include a mix of fixed and variable expenses. For example, your rent or mortgage payment is likely fixed since you pay the same amount all the time. But your utility bills can be variable if you pay more in winter and summer, but less in spring and fall.

One rule of thumb for housing is to spend no more than 30% of your gross (pre-tax) income on rent. This may not be feasible if you live in a metro area with high housing costs. But if you find housing is taking too big a bite out of your budget, you might consider taking on a roommate or moving to a cheaper area of town.

Wants

Wants are things you spend money on but don’t necessarily need to survive. This section accounts for 30% of spending under the 50/30/20 rule.

Examples of wants in a line-item budget can include:

•   New clothes that aren’t really needed

•   Travel

•   Dining out

•   Hobbies and recreation

•   Entertainment

•   Spa or salon visits.

The wants section of your budget is often where you can make the biggest cuts, since these are things you don’t need to spend money on.

Savings and Debt

The remaining 20% in the 50/30/20 budget is dedicated to saving and paying down debt. You could split it equally, and devote 10% to saving and 10% to debt. Or you might divide it differently if you’re prioritizing one financial goal over another.

Some of the things you might save money for in your budget include:

•  Emergency funds

•  Short-term goals, such as a vacation or new furniture

•  Longer-term goals, like the down payment on a house

•  A child’s future college education

•  Retirement.

Financial experts often recommend saving 10% to 15% of your income for retirement alone, so you might need to re-evaluate how much you’re setting aside for that goal. Increasing 401(k) contributions can help you get closer to that target if you’re not there yet. If you don’t have access to a 401(k), you might want to open an Individual Retirement Account (IRA).

On the debt side of the equation you might have student loans, credit cards, car loans, or other debts. How you choose to pay them down can depend on how much money you have to work with and what’s most important to you. The debt snowball method, for example, can help you pay off debts from smallest balance to highest. Meanwhile, the debt avalanche has you pay off debts based on interest rate, going from highest to lowest.

Recommended: Check out the 50/30/20 Budget Calculator to see the breakdown of your money.

Emergency Funds

If you don’t have at least three to six months’ worth of living expenses set aside in an emergency fund, consider making that a priority over other goals. The reason: Without a back-up fund, any financial bumps in the road — say, an expensive car repair, medical emergency, or loss of income — could force you to run up credit card debt that could take months, even years, to get out from under.

You can use an emergency fund calculator to help you determine how much you should save.

3. Prioritize and Automate

Prioritizing monthly expenses means deciding where your money will go first. This might include monthly bills and basic living expenses, along with saving and extra payments on debt. What’s left over after that can go towards your wants.

The more you can automate your finances, generally the more successful you’ll be at budgeting and tracking your money.

Some of the payments you might choose to automate include:

Some of the bill payments you might choose to automate include:

•  Mortgage or rent payments

•  Utilities

•  Cell phone and internet bills

•  Car insurance

•  Student loan payments

•  Credit card bill payments

•  Transfers to your emergency fund/other savings

•  Retirement contributions.

Benefits of Automation for Financial Success

Here’s a look at some of the benefits of putting a portion of your spending and savings on autopilot:

•  Reduces the risk of missing payments and getting hit with late fees and interest charges.

•  Helps you build a consistent savings habit without having to remember to transfer money into savings or investment accounts.

•  Minimizes the effort required to manage your finances manually.

•  Removes funds from immediate reach, helping you avoid the temptation to spend savings on impulse purchases.

4. Set Up a Spreadsheet

To track your monthly expenses, you might set up a simple spreadsheet where you list your income and monthly expenses and set saving targets. You can use the SUM function in a spreadsheet to automatically add values together. At the end of each month, you fill in the data and see how everything lines up.

Key Spreadsheet Templates for Budgeting

If you’d rather not go to the trouble of setting up rows, columns, and formulas, you could simply use a pre-made spreadsheet template.
For example, Google Sheets offers free pre-made budget templates, such as an annual budget and a monthly budget. Or if you have Microsoft 365 software, you can download a free pre-made Excel template for budgeting, such as a monthly budget, personal budget, or household budget.

5. Use an App

If you’d rather not have to turn on your computer and manually enter values, you might prefer using a budgeting app for tracking monthly expenses.

These tools can typically link to your bank and credit card accounts and will periodically pull transaction data from your accounts. This allows you to see how much you’ve spent right on your screen in one simple place; no toggling back and forth.

Some apps even allow you to tag or categorize expenses and create graphs or charts so that you have a visual representation of where your money is going each month.

6. Track Your Money With Your Bank’s Help

Many banks provide built-in expense tracking features within their online banking platforms or apps. These tools can often link to outside accounts, track and categorize your transactions, and offer financial insights that can help stay on top of your budget.

For instance, SoFi can help you to:

•  Connect financial accounts in a personal dashboard

•  View and track expenses

•  Monitor your credit scores

•  Create a budget plan

•  Track retirement savings and other money goals

•  Review your debt situation.

Why Is Tracking Your Spending Important for Financial Management?

Tracking your expenses is essential for managing your money because it provides transparency into your spending habits. After a few months of tracking your spending, you’ll likely have a clear sense of where your money is going. This information can empower you to make better financial decisions moving forward.

How Tracking Supports Long-Term Financial Goals

When you spend haphazardly — and simply hope it will all work in the end— you can end up overspending on things that don’t mean that much to you, while giving short shrift to the things that do, like saving for a home, a child’s college education, or retirement.

It’s generally much easier to start saving for these milestones early, then to try to catch up later. This is due to the magic of compound returns — when the returns on your money get reinvested and earn returns of their own. The earlier you start saving for long-term goals, the more you benefit from compound growth.

How Often Should You Review Your Spending?

It’s a good idea to review your spending at least once a month. This allows you to see how your actual spending and saving amounts line up with your plan, and if you need to rejigger your budget for the next month.

Setting a Routine for Monthly Expense Reviews

To get into a routine for monthly expense reviews, you might choose a specific day each month (ideally at the end) to review your expenses.

If you’re budgeting manually, this is when you would gather your bank/credit card statements and receipts and log in your income and expenses. If you’re using an app, most of this work may already be done for you.

Either way, you’ll want to compare your actual spending to your planned spending, identify areas of overspending, and make any needed adjustments to your budget for the following month to ensure you’re on track with your financial goals.

Avoid Common Spending Tracking Mistakes

When trying to figure out how to keep track of expenses, you may make a mistake or two along the way. Here are two common ones to keep in mind:

Overcomplicating the Process

Using overly detailed tracking methods can be overwhelming and discouraging. It’s typically better to stick to simple and effective systems that fit your lifestyle. For example, if you’re not a spreadsheet person, don’t feel like you have to force yourself to embrace them. You might consider using a budgeting app, or simply pen and paper to stay on top of your budget. The best way to track monthly expenses is the one you’ll stick with.

Ignoring Small Expenses

Small, frequent purchases can add up significantly over time. To make sure day-to-day cash expenses don’t slip through the cracks, you might jot them down in a small notebook (or the notes app on your phone). Alternatively, you could collect your receipts in an envelope. Either way, it’s important to add these expenses to the appropriate spending categories at the end of the month.

Recommended: Budgeting for Beginners: A Guide

The Takeaway

Tracking your monthly expenses is an essential part of financial success. Whatever method you choose (pen and paper, a spreadsheet, or an app), it can give you key insights into your spending habits. Once you know where your money is going, you can make informed decisions about how you want to spend and save moving forward.

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FAQ

Why is tracking spending important for financial management?

Tracking spending allows you to see where your money is going, and where you might be overspending (or wasting money), each month. When you track monthly spending regularly, it becomes easier to make a realistic budget so that you can spend and save wisely, as well as work toward other financial goals.

How often should I review my spending?

Ideally, you want to review your spending at least once a month, so you can assess your financial progress and make adjustments as needed. Some people prefer weekly reviews for more real-time tracking, while others do daily check-ins to stay on top of their budget. The key is consistency — frequent reviews help you catch issues early, maintain control over your finances, and ensure you’re sticking to your financial plan.

How can I categorize my expenses to get a better understanding of my spending habits?

One simple way to categorize your expenses is to divide them into three main buckets: needs (rent, utilities, groceries), wants (entertainment, dining out, subscriptions), and goals (savings and debt repayment).

With the 50/30/20 approach to budgeting, you would put 50% of your monthly take-home pay towards needs, 30% towards wants, and 30% towards saving (including retirement) and making debt payments beyond the minimum. Depending on your expenses and goals, however, you might need to decide to tweak these percentages.

What are some common mistakes people make when tracking their spending?

One common mistake people make when they track spending is overcomplicating the process, which can make it harder to stay consistent. Other common errors include: ignoring small expenses, which can add up and lead to inaccurate budgeting; and being inconsistent with tracking, which can result in overlooked wasteful spending or missed opportunities to save more effectively.

How do I track spending if I have irregular income?

It can be tricky to budget and track spending if you have irregular income, but it’s not impossible. One solution is to look back at what you’ve made over the last six months, then divide that number by six to determine your average monthly income. You can then use this number to offset your monthly expenses. Another option is use the lowest amount you earned over the last six months as your monthly income to ensure you don’t overspend.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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A naked call, or uncovered call, is generally considered a high-risk option strategy. Naked calls are when an investor sells or writes call options for an underlying security they don’t own. The seller is anticipating that the underlying stock price will not increase before the call’s expiration date, which may require them to purchase shares that are higher than the market price to close the position.

It is almost always safer for traders to sell calls on a stock they already own — known as a “covered call” position — than those they don’t. This way, if the stock price increases sharply, the trader’s net position is hedged. Naked calls, on the other hand, may be considered speculative trades. You keep the premium if the underlying asset is at or in the money at expiration, but you also face the potential of seeing unlimited losses if the option to buy is exercised.

Understanding Naked Calls

When a trader sells or writes a call option, they are selling someone else the right to purchase shares in the underlying asset at the strike price. In exchange, they receive the option premium. While this immediately creates income for the option seller, it also opens them up to the risk that they will need to deliver shares in the underlying stock, should the option buyer decide to exercise.

For this reason, it is generally much less risky to use a “covered call strategy” and sell an option on an underlying asset that you own. In the case of stocks, a single option generally represents 100 shares, so the trader would want to own 100 shares for each option sold.

Trading naked calls, on the other hand, is among the more speculative options strategies. The term “naked” refers to a trade in which the option writer does not own the underlying asset. This is a neutral to bearish strategy in that the seller is betting the underlying stock price will not materially increase before the call option’s expiration date.

In both the naked and the covered scenarios, the option seller gets to collect the premium as income. However, selling a naked call requires a much lower capital commitment, since the seller is not also buying or owning the corresponding number of shares in the underlying stock. While this increases the potential return profile of the strategy, it opens the seller up to potentially unlimited losses on the downside.

How Do Naked Calls Work?

The maximum profit potential on a naked call is equal to the premium for the option, but potential losses are limitless. In a scenario where the stock price has gone well above the strike price, and the buyer of the option chooses to exercise, the seller would need to purchase shares at the market price and sell them at the lower strike price.

Hypothetically, a stock price has no upper limit, so these losses could become great. When writing a naked call, the “breakeven price” is the strike price plus the premium collected; a profit may be achieved when the stock price is below the breakeven price.

Investing in naked calls comes with significant risk and requires discipline and a firm grasp of common options trading strategies.

Writing a Naked Call

Although there are significant risks to naked calls, the process of writing them can be straightforward. An individual enters an order to trade a call option; but instead of buying, they enter a sell-to-open order. Once sold, the trader hopes the underlying stock moves sideways or declines in value.

So long as the shares remain below the strike price at expiration, the naked call writer will keep the premium (or credit) collected. However, if the company that issued the shares releases unexpected good news, or the shares simply have positive price momentum, the stock price can go upward and expose the naked call writer to potentially significant losses should the buyer exercise the call option.

There are dozens of options on stocks and exchange-traded funds (ETFs) with differing expiration dates and strike prices. For this reason, a trader must take a directional position on the underlying stock price while also accounting for the impact of time decay leading up to expiration. Keeping a close eye on implied volatility is important, too.

Closing Out a Naked Call

When the trader wants to exit the trade, they create a buy-to-close order on their short calls. Alternatively, a trader can buy shares of the underlying asset to offset the short call position.

Naked Call Example

Let’s say a trader wants to sell a naked call option on shares of a stock. Let’s also assume the stock trades at $100 per share.

For our example, we’ll assume the trader sells a call option at the $110 strike price expiring three months from today. This option comes with a premium of $5 per share, which they receive for selling their options. This call option would be considered “out of the money” since the strike price is above the underlying stock’s current price.

Thus, the option only has extrinsic value (also known as time value). This naked call example seeks to benefit from the option’s time decay, also known as theta. At initiation, the trader sells to open the trade, and then collects the $5 premium per share.

As the option nears its expiration date, time value diminishes, and the option price may decrease if the stock price does not significantly rise. If the stock price ends below the strike price by expiration, the option could expire worthless, allowing the trader to retain the full premium as profit.

Conversely, if the stock price increases significantly — say from $50 to $60 — the traders who sold the call at a $52 strike price could face a loss of at least $8 per share ($60 market price minus the $52 strike price, less any premium received). If multiple contracts are sold, the losses can add up quickly.

For example, if the stock price rises during the contract period, the trader who sold the call option may face increasing losses as the stock moves further above the strike price.

Using Naked Calls

In general, naked calls are best suited for experienced traders who have a risk management strategy in place already.

Naked calls may appeal to traders seeking speculative opportunities, since they may profit if the underlying stock price remains stable or declines. The strategy comes with the risk of potentially unlimited losses and other considerations, such as liquidity concerns and the potential need for a margin account or leverage.

The challenge of trading naked calls is the need for sufficient liquidity to manage adverse price movements. If the underlying stock experiences unexpected positive momentum, its price may rise sharply, leading to substantial losses for the trader. This risk is compounded when a trader does not have adequate funds to cover the margin requirements associated with the position.

This strategy may require you to open a margin account with a broker so you can tap into their liquidity if necessary. Brokers typically enforce strict margin requirements for naked calls to mitigate this risk, which can result in margin calls if the account value drops too low.

Naked call strategies are most appropriate for seasoned traders who thoroughly understand options mechanics, as well as the factors that influence price movements (volatility, time decay, and underlying stock performance). These traders should implement stringent risk controls, such as predefined exit strategies and position sizing, to limit exposure.

Risks and Rewards

The potential for unlimited losses makes naked call writing a risky strategy. The reward is straightforward — keeping the premium received at the onset of the trade. Here are the pros and cons of naked call option trading:

Naked Call Alternatives

One common alternative to naked calls is known as “covered call writing.” This strategy includes owning the underlying stock while selling calls against it. This can be a more risk-averse alternative to naked calls, but the trader must still have enough cash to purchase the necessary shares (unless they are using margin trading).

There are other, more complex options strategies that can help achieve results similar to naked call writing. Covered puts, covered calls, and bear call spreads are common alternatives to naked calls. Experienced options traders have strategies to manage their risk, but even sophisticated traders can become overconfident and make mistakes.

Selling naked puts is another alternative that takes a neutral to bullish outlook on the underlying asset. When selling naked puts, the trader’s loss potential is limited to the strike price (minus the premium collected) since the stock can only go to $0 — however, that loss can be significant.

The Takeaway

A naked call strategy is a high-risk technique in which a trader seeks to profit from a declining or flat stock price. The maximum gain is the premium received while the risk is unlimited potential losses. As with all option trading strategies, traders need to understand the risks and benefits of selling naked calls.

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