If you get paid and hope you have enough money to pay your bills while still having fun, you need to create a budget. If you have dreams of owning your own house and are wondering where the down payment will come from, you need a budget. If you dream of sailing the Caribbean when you retire, you need a budget.
A budget will help you get a handle on how you spend money and create a plan to achieve those long-term goals. In this article, we’ll answer one of the most pressing questions, “how should a beginner budget?” and more.
Let’s get started.
Budgeting For Beginners
Budgeting is a plan to track your money. It takes a little time in the beginning, but if you follow some simple steps, and analyze your budget regularly, your plans for saving money will be on track in no time!
Understand the Budgeting Process
Budgeting is simply taking your income and allocating it to your monthly expenditures. At the beginning of the month, you create a plan to ensure that all your bills are paid on time with money left over for savings, groceries, and entertainment.
Why is a Budget Important?
A personal budget keeps you on track with your spending. It creates awareness of your habits and allows you to pinpoint areas where you are overspending. Budgets also allow you to repay your debt faster, save for retirement or emergencies, and have some fun at the same time.
Creating a budget takes some stress off of your financial situation. You know exactly where you stand. If your budget shows a shortfall in income, you need to get a second job, start a side hustle, or find another way to add money.
If your budget has some wiggle room, you can invest or indulge in something you want.
Creating a Budget
Here are some simple budgeting tips to get you started:
Determine Why You Want a Budget
There are many reasons to create a budget. It could be as simple as figuring out where your money needs to go and if you have any left over for saving or having fun. Budgeting creates awareness of where your money comes from and how you spend it. It helps you find ways to save money and shows you where you might be overspending.
Budgeting also gives you peace of mind and provides financial security. Many couples fight about money—either because they feel it isn’t enough or disagree on where it should be spent. When a budget is created as a team, everyone has a say in where the money goes.
Budgeting helps you to create a plan to get out of debt. Once you see every expense in front of you, it’s easier for you to make cuts in some areas and earmark that money for other areas that align more with your financial goals and values.
Once you create a budget and have it in print, you are more likely to stick with it.
Figure Out Your Income
The first step in creating a budget is to calculate how much money you have coming in. These could be from a paycheck from a steady job, alimony or child support payments, income from investments, or money from side hustles.
Determining your income can get tricky if you own your own business. One option is to take an average of your income over the last several months, subtract business expenses (and taxes), and then take what’s left and pay yourself a salary. Use this as your income.
You can also calculate what you earned last month and use that money to pay this month’s expenses. This takes a bit longer as your budget is more flexible. With this method, you also need to plan ahead to ensure you are earning enough this month to pay next month’s bills.
Calculate Your Monthly Expenses
The second step is to write down how much you spend. Fixed expenses are easy to track—your mortgage or rent stays the same each month, as does your insurance premiums and car payment.
Utilities can fluctuate depending on the time of year, but you can figure out an average. (Some companies also offer budgeted billing where you can even out those bills over the year.)
Other expenses vary from month to month. These include utilities, groceries, and entertainment. The best way to get a hold of how much you usually spend on these bills is to track your spending for a period of time.
You can write down each expense as you incur them. You put gas in your car, buy a coffee, or purchase groceries—write it down. Some apps make this easy, plus your bank statements are helpful.
Then there are irregular expenses. These are the ones that don’t occur monthly. For example, you might pay your trash service quarterly or your insurance every six months. This also includes random visits to the doctor’s office and license plates for your car. You need to be able to plan for these items. You might choose to set aside some money from each month’s budget or create a category that covers these items.
Set Realistic Goals
Earlier, I asked you to think about why you were creating a budget. Some of your answers might be buying a house or car, building an emergency fund, or saving for college, retirement, or a vacation. Each of these is a considerable expense and will take time to save for.
Realistic goals fit within your monthly budget and allow you to save in a reasonable amount of time. Saving for these goals should not get in the way of paying your day-to-day bills, so starting small and building up over time is perfectly fine.
At the same time, your goals should be specific and include deadlines. Take your financial goal and divide it by the number of months until your purchase.
For example, if you want to build an emergency fund of $1,000 in the next six months, you will need to set aside $166.67 per month. This will give you the motivation to cut down on discretionary expenses for the purpose of reaching your goals.
Identify Your Discretionary Expenses
Discretionary expenses are any expenses that are not necessary to live. Your basic needs are food, water, shelter, and air. Your mortgage or rent is essential (and expenses related to that, such as utilities and insurance), and basic groceries. Everything else is probably discretionary. There is a bit of a gray area here, as you will decide what is essential to you.
Discretionary expenses are those you can modify or cut out to meet your other financial goals. For example, you can take leftovers for lunch instead of heading to the cafeteria. Or you can watch Netflix instead of going to the movie theater. You can take the bus instead of driving your car.
Make a Plan
Once you’ve gathered your monthly income and monthly expense amounts, it’s time to create a plan. If your essential expenses are greater than your income, you’ll need to find a way to make more money or lower some of your bills.
If your expenses are less than your income, your next step is to map out where you want your money to go.
There are a few ways to go about this:
- The 50/30/20 budget allocates 50% of your money to your needs, 20% to saving and paying down excess debt, and 30% to discretionary expenses.
- The zero-based budget has a category for every dollar spent.
I recommend starting with your income and then subtracting your needs—mortgage, rent, insurance, car payment, minimum debt repayments, basic groceries, etc.
From what’s left, earmark some into savings, credit card payments, an emergency fund, and retirement. Then you’ve got the rest to work with. You can either save more toward long- and short-term goals, get some more groceries, or use it for fun.
Adjust Your Spending to Stay On Budget
Keep an eye on all your budget categories, but if you need to make cuts, look at your wants first. Instead of heading to the restaurant, make dinner at home. Then, look at your needs. Find ways to save money to meet your other goals.
If your insurance takes up a big part of your budget, shop around for a better rate. Clip coupons and use gas rewards to save on everyday expenses. You probably don’t need a complete overhaul, but you’ll be surprised how little adjustments add up.
Always Be Monitoring and Adjusting Your Budget
It’s important to note that a budget is not set in stone. It’s in part fluid and dynamic, and you should review it at least monthly. Check and see where you are overspending or where you can cut down on bills. If it’s not working for you, try something else.
A budget is for you; only you know whether it’s meeting your needs.
During your monthly review, look at those irregular and variable bills. You may have to earmark savings or discretionary funds to pay the vet bill if your pet gets sick.
If your electric bill is lower than budgeted, you can use that money for a savings goal. Unexpected bills may signal the need for extra savings in your emergency fund or purchasing a pet insurance plan.
At the same time, if you get a raise or an unexpected influx of money, add it to the areas of your budget that need it before spending it on something frivolous.
Tips to Stick to Your Budget
Once you’ve got a plan that works for you, the challenge is sticking with it. Here are a few suggestions:
Sleep On Big Purchases
Overspending can result from impulse purchases. Sellers convince you that you need something and that if you don’t buy it immediately, you will miss out.
The idea here is to get you to stop and think about your purchase. When you find something you want, don’t buy it immediately. Instead, go home and give it some thought. If, after 24 hours, you still want the item AND it fits into your budget, go ahead and make the purchase.
Never Spend More Than You Have
While it’s tempting to apply for more credit, pay for something on consignment, or purchase while dipping into another category of your budget, that’s a recipe for trouble. Unless it’s an emergency, stick to your budget, at least regarding discretionary expenses.
Stick to a Lower Credit Card Limit
Credit card companies love to lend you money, and once you reach your credit limit, they are happy to extend that limit further. Instead of adding more credit card debt, plan ahead for purchases and use a savings plan.
If you use credit cards for purchases, pay the balance each month. Ideally, these expenses should already be built into your budget. If you are using a credit card to build up your credit score, do not spend more than 30% of your limit and pay it off monthly.
Try a No-Spend Challenge
The no-spend challenge is a creative way to use what you have and reduce spending. You still pay for your necessities, but you cut out discretionary spending. Instead of going to the grocery store, check your pantry and freezer for long-forgotten foods to eat.
Instead of buying a new product, repurpose one you already have. Instead of spending money on entertainment, you find no-cost ways to have fun, for example, free days at the museum or hiking at the local park. You get the idea.
Plan Your Meals
You’ve cut down on going to restaurants, the work cafeteria, or fast-food drive-throughs to save money, but you still have to eat. If you buy all the ingredients for some recipes, you can end up blowing your budget on food.
Plus, many people buy a whole bunch of food and waste a lot of it. The key is to find low-cost meals using items on sale for meals you’ll actually eat.
Get out your calendar and determine which days you will have more time to cook and which days you’ll need meals on the go. Crockpot meals are great when you’re going to be gone all day. Soups usually have leftovers you can take to lunch the next day.
You can cook on the weekend and put servings in individual containers to pop into the microwave. You might want to check out meal subscription boxes, depending on your budget and lifestyle.
Final Thoughts on How Should a Beginner Budget
Creating a budget and sticking to it is a great way to get a hold of your finances. Whether you’re in a bit of trouble or just want to create awareness of where your money is going, create a budget and see what the numbers tell you.
There are budgeting tools and other resources available on this site! Check them out here.