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Beginner’s Guide to Budgeting
In this beginner’s guide to budgeting, I am going to discuss what budgeting is, the steps to create a workable budget, and how to succeed at budgeting. I’m also going to talk about common budgeting questions and answers.
Budgeting is so important to your financial success because when you get control of your spending by creating and then following a monthly budget, you gain control of what one financial expert calls your largest wealth-building tool: your income.
How I Learned the Importance of Budgeting
Fifteen years ago, before I was interested in or knew very much at all about personal finance, I think the budgeting to me, if it meant anything at all, meant to not spend more than I had in my checking account.
About a year after I graduated from college my husband had just started college, and we were taking an extracurricular class together that had nothing to do with personal finance overall. But as part of the class discussion that day we talked about compound interest, and that conversation changed the whole trajectory of my life.
From that time I became very interested in and then passionate about personal finance, and I read countless books and articles to learn all that I could about the topic. I have taught community personal finance classes (Ieading Dave Ramsey’s Personal Finance University), and my husband and I have also been able to use the knowledge we have about personal finance to pay off over $260,000 of debt in less than 10 years (including our mortgage!).
Why Budgeting Is Essential to Save Money
One of the most important foundational principles of personal finance is budgeting. By creating a budget, or spending plan as it is also called, you are able to determine how you want to spend, or not spend, your money in order to accomplish the goals with money that you want to.
Personal finance in general and budgeting in particular are so important because money really touches every aspect of our lives. There is not much that we can do in this life that is not connected to or dependent upon money in some way. What we spend our money on indicates what is important to us. And how we spend our money really does determine not only our own financial future and influences some of the things that we are able to achieve but potentially also influences the financial futures of our future posterity, as well.
What Is Budgeting?
The first question I want to discuss in this beginner’s guide to budgeting is this: what is budgeting?
The word budgeting, unfortunately, has some pretty negative connotations associated with it for some people. Some people treat it as if it is the dreaded B word. Some individuals feel that a budget is constraining, that it takes all of the fun out of life. And because of that misconception, they choose not to budget, and so they are robbed of the power that comes from truly making your money work for you.
The reality is that a budget is nothing more than, as I mentioned above, a plan for the way that you choose to spend your money. You get to create the budget and decide how much you are going to spend in each budget category.
How to Get Started with Budgeting
In this beginner’s guide to budgeting I am going to share 9 simple steps to make a budget that will actually work to help you save money and reach your short and long term financial goals.
1. Track what you spend as you work to make your budget.
Track what you spend for a couple of weeks or a month to really get a good feel for where your money has been going. This doesn’t have to be perfect; just do your best. Use a debit card to make purchases and pay bills as much as possible during this time so that you can go to your bank or credit union website to see what you have spent.
Sign up below (after step 2) to receive a free spending tracker form!
2. Start with a simple, hard-copy budget.
When you very first start budgeting, I recommend using a paper budget. This gives you a simple way to create your first budget by helping you to get a rough idea of what you would like to spend where. You can sign up below for a simple budget that will help you get started.
Once you get the hang of budgeting and have done it for a few months, go ahead and switch to a digital system. Or if you really can’t stand paper and you prefer to do everything electronically, you can build a budget in Excel or use a program such as You Need a Budget (YNAB.com). It’s a great, user-friendly budgeting tool with a lot of awesome features.
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3. List all income sources as you work to make your budget.
If you have a job where you receive regular paychecks, this shouldn’t take too long. Simply add up all income (for you and your spouse), and write that number at the top of the page. Don’t forget to include freelance income and any money earned from second jobs, overtime, or side hustles.
4. List all of your expenses.
Then begin to list your expenses. Don’t forget to include tithing and charitable giving in this category.
Do a zero-based budget so that every dollar you have goes to a designated place. If you don’t, it’s almost certain that the unallocated money will get blown in one area or another. Be intentional with all of your money so that your money really works for you.
First list your regular, fixed expenses. Gather your regular bills, such as mortgage or rent payment, car payment, public transportation pass, utilities, health insurance premium (if not deducted automatically by your employer), cell phone bill, internet bill, car insurance bill, and so on.
Here is an easy list for reference of common fixed expenses you can use when creating your budget:
- Charitable giving
- Rent or mortgage
- Renters insurance
- Homeowners insurance and property taxes (if not paid with the mortgage)
- Car payment
- Automobile insurance
- Life insurance
- Health insurance
- Dental insurance
- Cell phones
- Cable/satellite TV
- Home phone
- Gym or rec center membership
- Retirement savings
Then list your variable expenses. After you add up all of your fixed expenses, figure out your variable monthly expenses such as groceries, gasoline, household expenses, clothing, entertainment and eating out, pet food and supplies, and toiletries.
And here is an easy list for reference of common variable expenses you can use when creating your budget:
- Household items (cleaners, towels, and related items)
- Eating out
- Public transportation
- Utilities (electricity, natural gas, water, sewer, garbage)
- Toiletries, makeup, and related items
- Child care
- Pet food and supplies
- House maintenance
- Home furnishings and appliances
- Car maintenance
- Kids’ school or sport/music expenses
- Recreation/sports and vacations
- Hair care (stylist/barber)
- Christmas and gift giving
5. Decide how much money you will budget toward savings.
It’s likely when you first start budgeting that you won’t have a lot of money left over to put toward savings. It’s OK to start small, but as quickly as you can, start increasing the amount that you save toward specific categories. And no matter how little your income, start saving something right from the beginning if you possibly can, to get yourself into the habit of saving.
As long as you make a little more than your fixed expenses each month, then determine a realistic amount to save, and save that portion of your income before you do anything else—known as “paying yourself first.” If you plan to just “save what’s left over,” the chances that you’ll have anything left to save are slim.
If you crunch the numbers and you really just don’t have anything left over to put toward saving (and then paying off debt once your starter emergency fund is funded—see the next section) after paying all of your bills, then you should look at ways to earn additional income.
6. Fund your starter emergency fund (EF) first.
The first thing you should start saving toward when you make your budget is a starter emergency fund. This is a crucial next step because an emergency fund gets you out of the mode of relying on credit cards and it really does virtually stop emergencies from happening. It’s not that your car’s transmission never goes out or your roof never springs a leak, but those things are no longer emergencies—they are inconveniences because you have the money saved up to pay for them.
You should put all extra money above bare-bones expenses (that means minimal spending on eating out, entertainment, and so on) into your emergency fund until it is fully funded. If you have consumer debt, start with a small emergency fund of $1,000 to one month’s worth of expenses (depending on how likely you are to need the money—for example, scale upward if you have an older car or home), and pay off your consumer debt before you build your full emergency fund of three to six months of expenses. Try to build up your $1,000 starter emergency fund in a month or less by slashing expenses such as your grocery bill and entertainment spending, by selling stuff, and by earning extra money through overtime or a side hustle or second job.
Learn more about how to fund your emergency fund as quickly as possible.
After you have funded your starter emergency fund and have paid off all of your nonmortgage debt (discussed in the next step), start working toward your fully funded emergency fund and toward saving for large purchases.
7. Start working to pay off your debts.
Once you a starter emergency fund of at least $1,000, begin working to pay off your debts.
After you start budgeting and have all of your expenses written down on paper, you will start to see areas where you can reduce your spending (see this article for more than 35 areas where you can cut your spending) in order to start paying off your debt. Once you have a good handle on doing your monthly budget, try to set up your budget so that you can pay extra payments on your debt in order to have all of your nonmortgage debt paid off within 18 to 24 months—or faster, if you can! (You may want to find ways to increase your income or find things to sell in order to help you reach this goal.) In order to pay off your debts, use either the snowball debt payment method or the avalanche debt payment method.
Briefly, the snowball method is where you list all of your debts smallest to largest and you pay just minimum payments on all of your debts except for the smallest one and then throw all of the money that you can toward that smallest debt until it is paid off. Then once that first debt is paid off, you use the all of the money from your budget that you were spending on paying off that smallest debt to attack your next smallest debt. And then so on.
With the avalanche method, you similarly pay minimum payments on all but one debt, but the debt that you attack first is the one with the highest interest rate. You will save on interest if you use the avalanche method, but I recommend that you follow the snowball method because of the motivation that comes from paying off the smaller debts first and getting the emotional boost from those relatively quick wins. The snowball method is the method we used to pay off more than $60,000 in nonmortgage debt.
8. Adjust your budget categories if you overspend in an area.
Because you’re going to go off of a zero-based budget, if you decide you have to spend more in one area than you planned for, then you need to pull the money from another spending category. So if something comes up where you need to spend more on your gifts category, for example, because you receive a wedding invitation, then the amount in your entertainment category or fun money or clothing category or somewhere else will need to be adjusted. Your budget needs to balance out.
9. Continue tracking your spending each month, and adapt your budget as needed over time.
It will probably take about three months to work out the major kinks in your budget, but then it will really start to work. You should create a specific budget for every month because no two months are exactly the same, but once you’ve been budgeting for a while, your budget will be mostly set and you’ll only have to make minor tweaks from month to month. However, when major events happen in life that cause big changes in your finances, be sure to adapt your budget accordingly.
How to Succeed at Budgeting
Another important thing to discuss in this beginner’s guide to budgeting is how to be successful at budgeting. To succeed at budgeting, here are 4 more important things you can do.
Automate Your Finances to Succeed at Budgeting
To avoid getting overwhelmed, automate as much of your finances as possible. I don’t have any bills that I regularly pay with a check—we use bill pay for all of our expenses, including tithing and charitable donations. Automating our financial transactions saves time and makes life much simpler (and helps me avoid forgetting to pay my bills!).
If you want to learn more about how to automate your bill paying, saving, and investing to simplify your life and start to build wealth, I recommend The Automatic Millionaire by David Bach. It’s one of my favorite personal finance books because it gives simple, actionable steps you can follow. And check out this article for more information on automating your finances.
Use Cash for Budget Categories You Tend to Overspend On
Some areas that you’ll probably want to use cash for in your budget include food, entertainment, clothing, and personal fun money. You can use envelopes to keep your cash for the week or month or a wallet with different compartments. You can learn how to stop overspending here.
Budget to Save for Large Purchases and Expenses as Soon as Possible
If you do not have any debt and you have already created your fully funded emergency fund, then start to save toward other financial priorities. In order to stay out of debt and build wealth, you’ve got to be able to cover your expenses without borrowing money. Which means you need to have the money saved to cover these costs with cash. For financial well-being, all families should have the following savings accounts in place and be regularly funding them.
- Create a vehicle maintenance and replacement fund as soon as possible. Shorter term, funding your vehicle savings account prevents regular car maintenance and unexpected repair costs from becoming financial emergencies. And longer term, this fund helps you save thousands of dollars in interest by paying a car payment to yourself instead of to a bank or other lender.
- Create a house maintenance or down payment fund. If you are a homeowner (or plan to be a homeowner in the future), then this is a must. Eventually virtually everything in your home will need to be repaired or replaced. And some of those items are really expensive. Yes, homeowners insurance will take care of many things, but whenever you can, you should be your own insurance plan—you should self-insure by having savings to cover those inevitable expenses that will crop up. This will help to keep your insurance premiums as low as possible—so raise those deductibles! And there are some things that homeowners insurance simply won’t pay for (generally), such as burst water pipes, collapsed sewer lines, and damage caue by earthquakes, mold, floods, and more.
- Create other savings funds. Here are some examples of other savings funds that we have and that I recommend you set up as soon as possible:
- Save for vacations, Christmas, gift giving, larger household items (such as appliances and furnishings), and more. Once you have the essential items covered in your budget (food, clothing, shelter, transportation, and utilities, for example), begin saving for things like vacations, Christmas, household furnishings and appliances, and so on. The easiest way that I’ve found to do this is by having separate savings accounts for each category. Shortly after I got my first job I signed up for an ING checking account. What I loved about ING is that I could add as many different savings accounts as I want, and see them all together (and the sum total of the money in our various accounts). ING has since been bought out by Capital One, and even though I don’t generally recommend really big banks, I have to say that I’ve never had a problem with my Capital One 360 account. In fact, the one time I did have a problem (which was completely my fault—user error), they fixed it in about a minute. Their customer service was great. I know it’s going to sound a little crazy, but we have over 10 savings accounts for different things—for me, I just like to know we won’t accidentally spend money we have designated for one thing on something else.
- Create a dream fund. When you are out of debt and have begun to save for all of the above items, begin funding your dreams. Because learning to be financially savvy isn’t just so you can pay all your bills and retire with dignity and give to the causes you support—though all of those things are extremely important. It’s also so that you can really enjoy the many things money can buy, guilt free and without debt. This might mean saving for a motorcycle, a nice car, an RV, a boat, an exotic vacation—whatever you want. If you’re young or have a lot of debt it may be years before you can fully fund or maybe even start these savings funds, but if you keep it in the back of your mind, it will help you stay on track financially.
Budget Money to Save for Retirement and Save for Kids’ College
There’s a saying in the personal finance industry that the best time to start investing was yesterday—and the next best time is now. So as soon as you can, start investing for retirement in a 401(k) or Roth IRA (or both!), and start saving for your children’s college expenses in an educational savings account (ESA) or college 529.
Even if you start with just $100 a month, the savings begins to grow quickly, and by seeing the progress you make, you’ll be motivated to save even more. We have investment accounts with both Schwab and Vanguard. Both are inexpensive, excellent options to help you start investing for retirement and saving for college today.
Common Questions about Budgeting
I also want to discuss in this beginner’s guide to budgeting a handful of commonly asked questions and answers about budgeting.
How Do I Budget for Irregular Expenses?
As mentioned above, it is also important to include irregular expenses in your budget. So, if you pay for your life insurance once a year, for example, then you should divide the annual premium by 12 and then save that amount each year in a specific savings account just for life insurance (so that you won’t inadvertently spend the money on something else). You can save for your auto insurance, automobile registration, and other such expenses in the same way.
How Do I Budget If I Have an Irregular Income?
If you have an irregular income, then base your budget on your earned income for the lowest month from the last 12 months. Then make sure that you also write a list of the priorities for the additional income that could come in. Put any extra money that does come in toward those priorities, in order from most important to least important (such as paying off your lowest debt) until the money runs out.
What If I Regularly Overspend the Budgeted Amount in a Particular Category or Categories?
If you are regularly spending more than the allocated amount in a budget category or categories, then this may mean that you are not being realistic about the budget category. For example, if you regularly budget $500 a month for groceries but you always spend closer to $600, then you may want to decrease another budget category or categories to have more money available for groceries. Or, alternatively, you can find ways to save money on groceries (find more that 70 tips here!).
That is true for whatever budget category you are overspending on. Chances are very good that you can lower the amount of money you spend if you really want to. You may need to find the motivation to save the money by finding meaningful long-term financial goals to work toward.
You can find more than 20 ideas for how to reduce your spending (for virtually every category) here. You can also find information on how to stop overspending here.
The issue could also be a lower than average income. If you make a low income, then one of your long-term financial goals needs to be to increase your income.
What If I Have Expenses That Do Not Seem to Fit in Any Budget Category?
It’s OK to have a small amount of money budgeted each month toward a “Miscellaneous” or similar category. We budget about $50 per month toward miscellaneous expenses (we don’t spend that much on miscellaneous items every month, but some months we spend more than that, so it balances out). This is basically like an “other household expenses” category for us. If you are budgeting much more than $100 a month, you probably need to take a look at what the money is going toward and make another budget category for that item or those items.
What Is the Best Budgeting Tool or Best BudgetingApp?
Because we started budgeting so long ago, we have always used a simple Excel spreadsheet that my husband created years and years ago that we just updated as we needed to with different categories (such as when the kiddos came along). However, after researching the different apps out there, if I were going to use an inexpensive but paid app, I would go with You Need a Budget (YNAB.com). They use a zero-based budget and even encourage you to get to the point where you are budgeting off of last month’s income, both of which I strongly endorse. They have really good reviews, and their app seems both robust and user friendly.
If you want to be able to have financial peace and stability and eventually reach financial freedom, you have to be able to have money left over after your spending to save and to invest. And in order to do that, you have to master a budget or spending plan. If you want to win financially, as with any area of your life, you have to make a plan and stick to it. You can find information on how to stick to your budget here.
What questions do you have about how to make a budget or how to start budgeting? Have you tried to budget before and not been able to stick with it? Leave a comment below and let me know!
Invitation to Share
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