Budgeting for Beginners: How To Start Budgeting

Budgeting is the process of creating a financial plan that outlines your income and expenses to help you manage your money more effectively.

It involves tracking your spending habits, identifying areas where you can cut back, and setting financial goals for the future.

If you’re sick of living paycheck to paycheck, worried about neglecting your savings, and want to get your personal finances under control, budgeting can help.

Why Should I Start a Budget?

While the idea of budgeting and living on a budget can be daunting, budgeting is important for achieving financial stability and security. If you’re not convinced you need a budget, here are five reasons to start budgeting:

  1. Budgeting helps you gain control over your finances. By creating a plan for your money, you are better equipped to make financially sound decisions and reach your goals. Budgeting can be especially helpful if you are trying to pay off debt, save for a big purchase, or build an emergency fund.
  2. Budgeting allows you to prioritize your spending based on your goals. For example, if your long-term goal is to buy a house, you can adjust your budget to save more money for a down payment. By aligning your spending with your goals, you are more likely to achieve them.
  3. Budgeting can help reduce financial stress and anxiety. By clearly understanding your financial situation, you can avoid overspending and the associated stress that comes with it. This can help you feel more in control of your finances and reduce the negative impact that money worries can have on your mental health.
  4. Budgeting can also help you prepare for unexpected expenses. By setting aside money for emergencies and unexpected expenses, you can avoid taking on debt to cover unexpected costs.
  5. Budgeting will help you build wealth over time. By creating a plan for your money and sticking to it, you can save more money and invest in your future. In time, this can lead to financial freedom.

Basic Budgeting for Beginners

A monthly budget can help you stay organized and focused on your personal financial goals. If you’ve never set or managed a budget before, it may seem overwhelming, but it doesn’t have to be. These steps will assist you in creating your first budget and, ultimately, becoming more financially stable.

Step 1: Determine Your Monthly Income

The first step in budgeting is to determine your monthly income. This includes any money you receive from your job, rental income, investments, or other sources. To calculate your monthly income, start by adding up all of your sources of income for a single month. If you receive a regular paycheck, this is the amount you receive after taxes, and other deductions have been taken out. If you are self-employed or have irregular income, estimate your monthly income based on your previous earnings.

Once you have calculated your monthly income, it’s important to keep track of it on a regular basis. This will help you adjust your budget as needed and ensure you live within your means.

Step 2: Determine Your Monthly Expenses

The next step in budgeting is to determine your monthly expenses. Start with your fixed expenses. These are often necessities with amounts that don’t change, including:

  • Rent or mortgage payments
  • Student loan payments and other debt repayments
  • Insurance
  • Cable and internet bills

Variable expenses are a little trickier to budget because the amounts change. Review your bank statements and credit card statements for the last three months or so and use an average for expenses such as:

  • Groceries
  • Gasoline
  • Entertainment
  • Clothing
  • Utilities like electricity and gas
  • Child care and babysitting

Use the average cost for irregular expenses, like vet bills, home repairs, and vehicle maintenance. This will help you avoid using a credit card when these expenses arise.

Be sure to include any bills that are due quarterly or annually. Divide the total by 12 to get your monthly expense. 

Step 3: Set Financial Goals

When it comes to managing your finances, setting clear and achievable financial goals is essential. Financial goals help you stay focused and motivated to stick to your budget.

Short-term financial goals are those that you aim to achieve within the next 1-2 years. These goals are typically more immediate and tangible, such as paying off a credit card debt, building an emergency fund, or saving for a down payment on a home.

Medium-term financial goals are those that you aim to achieve within the next 2-5 years. These goals may include paying off student loans or retiring a car loan.

Long-term financial goals are those you aim to achieve in the next 5-10 years or more. These goals may include retiring comfortably, paying off your mortgage early, or saving for a child’s education. Long-term goals require the most planning, patience, and discipline.

Create SMART financial goals by asking yourself what you want to achieve and why and being specific. Instead of saying, “I want to save more money,” say, “I will save $25,000 for a down payment on a home within the next two years by lowering my discretionary spending and earning more money by driving for DoorDash 3 nights a week.”

Once you’ve established your financial goals, break them down into manageable steps. Then you can incorporate your goals into your monthly budget by treating them as any other expense.

For example, if you aim to save $5,000 for a used car within the next two years, break that down into saving $209 monthly for the next two years. By breaking down your goals into smaller, achievable steps, you’ll be more likely to stay motivated and on track.

Step 4: Subtract Your Expenses From Your Income and Adjust

Add up your expenses, including your savings goals, then subtract the total from your income.

If you end up with a positive number, that means you’re living below your means. Consider putting your extra money toward one of your financial goals. You could use the money to make extra credit card payments, pad your emergency fund, or put it toward your vacation fund.

If your result is at or near zero, you’re not spending more than you make, but you don’t have any wiggle room. That can be an issue if an unexpected expense comes up or you underestimate your spending in one or more budget categories. Review your expenses and consider cutting back a bit to give yourself a cushion.

If you come up with a negative number, you’re spending more than you earn.  That’s not sustainable. Go over your spending and see if there are non-essential expenses you can cut back on or eliminate.

Step 5: Monitor Your Budget

Creating a budget is an essential first step in taking control of your finances. Your budget is not set in stone, however. If you’re new to budgeting, it may take a couple of months until you have your budget dialed in.

Income and expenses fluctuate month to month, so staying on top of your cash flow and adjusting your budget when necessary is important. You can use a spreadsheet, budgeting app, or pen and paper to track your budget. Reviewing your budget regularly will help ensure you have a realistic budget you can stick to.

At a minimum, you’ll want to do a month-end review. When you’re just starting to live on a budget, you may want to update your budget every time you spend money.

Compare your projected spending to your actual. Use the information to make adjustments for the upcoming month if needed.

Tips for Lowering Expenses

Man pulling Visa credit card out of his wallet to pay for a purchase.

Lowering your spending can be one of the most challenging parts of budgeting. It requires you to be honest with yourself about your spending habits and make some tough choices. Here are some strategies to help you reduce your expenses:

Lower Your Grocery Spending

Groceries likely take up a significant percentage of your household budget. Ways to reduce your grocery bill include:

  1. Planning your meals for the week based on items that are on sale.
  2. Meal prepping to save money, so you’re not tempted by takeout or restaurant meals.
  3. Buying in bulk when it makes sense.
  4. Using coupons.
  5. Shopping at discount grocers.

Lowering your food spending can have a big impact on your personal budget.

Read: 16 Ways To Spend Less Money on Groceries

Review Your Discretionary Expenses

One of the best ways to identify areas where you can cut back is to review all your discretionary expenses. This includes things like dining out, entertainment, and hobbies.

Look for areas where you can reduce your spending. You’re probably spending money you don’t have to on things you could do without. You might decide to eat out less often, cancel a subscription service, or only buy new clothes on sale.

Negotiate Your Bills or Switch Service Providers

Many people overspend on bills like cable, internet, car insurance, and cell phone plans. Take the time to review your bills and negotiate with your service providers to see if you can get a better deal. You may be surprised at how much you can save by simply asking for a discount.

Switching providers can also result in much lower monthly payments. Compare prices across different companies. If your current provider refuses to price match, switching can be your best option.

Reduce Your Utility Usage

Another way to cut back on expenses is to reduce your energy usage. This can include things like turning off lights when you leave a room, adjusting your thermostat, and using energy-efficient appliances. Not only will this help you save money on your utility bills, but it’s also good for the environment.

Find Cheaper Alternatives

Look for cheaper alternatives for things you regularly buy. For example, consider buying store-brand products instead of name brands or fixing things instead of replacing them. By making small changes like these, you can save a significant amount of money over time.

Read: 45 Things To Stop Buying To Save Money

Budgeting Techniques You Can Try

Glass jar with paper money next to a calculator.

Now that you are clear on your income, expenses, and goals, you can use one of many different budgeting methods to manage your money. Some may fit your preferences and needs better than others. Here are some popular ways to budget your money worth considering:

1. The 50/30/20 Method

The 50/30/20 budget rule popularized by Senator Elizabeth Warren and others suggests allocating 50% of your after-tax income to necessities, 30% to discretionary spending, and 20% to savings and debt repayment. Those percentages may be unrealistic if you live in an expensive city or carry a lot of debt.

2. The Zero-based Budget

Another popular method for budgeting money, zero-based budgeting requires assigning all of your net income to an expense. People refer to zero-based budgeting as giving every dollar a job because 100% of your income is put toward a budget category. A zero-sum budget does require more effort and monitoring than the 50/30/20 rule.

3. Envelope Budgeting

The envelope method of budgeting involves setting aside cash in envelopes for your expenses. Budgeting with envelopes and cash can help if you have overspending problems. This approach to budgeting is a bit cumbersome, and many people aren’t comfortable with keeping and carrying large amounts of cash.

4. Reverse Budgeting

A reverse budget has you set aside a percentage of your monthly income for savings goals and debt repayment before you spend money on anything else. You can set up an automatic transfer from checking to an investment or savings account around your paydays, so you save before you pay your bills or spend. This budgeting method prioritizes your savings goals and can help you get out of debt.

6 Tips for Successful Budgeting

Pink piggy bank.

Creating a budget takes effort, but sticking to it is where the real work begins. Here are some budgeting tips to make sticking to your budget easier.

1. Automate

Set up automatic transfers on or around your paydays to pay bills and fund your savings or retirement accounts. By automating as much as possible, you ensure you’re paying your bills on time and saving consistently.

2. Split Your Direct Deposit

If you get your paycheck direct deposited into your checking account, speak with your payroll department about getting a percentage of your wages or a specific dollar amount deposited in a savings or investment account. When you split your direct deposit, you prioritize savings.

3. Use Cash Instead of Cards

Using cash for your discretionary spending can help you spend less and know how much you spend. You may be reluctant to spend as much on things you don’t truly need when you physically have to hand over the money.

4. Plan for Large Purchases

If you’re considering buying an expensive item, plan ahead. Decide when you want to make the purchase and divide the price by the time you have, then make room for it in your budget.

For example, if you want to purchase a $1,200 laptop in 6 months, you need to save $200 per month. You may need to lower your spending in other budgeting categories to fund your laptop purchase, but you won’t have to take on debt or pay interest charges if you pay in cash.

5. Prepare for the Unexpected

Sometimes, even the most well-planned budget can’t prepare you for an unexpected expense. Medical emergencies, car repairs, or home repairs are unpredictable. That’s what makes having an emergency fund critical to financial success.

If you don’t have at least $1,000 set aside, start an emergency fund as soon as possible by factoring it into your budget. Ultimately, you’ll want to have at least three months of living expenses set aside in case of a job loss or other emergency.

6. Allow for Some Fun

Budgeting is not punishment. If you don’t give yourself a little room to enjoy your life and do something fun from time to time, you’ll get bored, feel restless, and frugal fatigue will set in. You might splurge a little too much or blow up your budget with a spending spree.

You’re more likely to be successful with your budget if you allow yourself a little fun.

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