No matter who the personal finance guru that you look for when it comes to financial advice, they all say the same thing: You need to create and follow a budget. A simple monthly budget is a roadmap to where your money goes so you can help achieve whatever your financial goal may be.
Preparing a budget for the first time can seem complicated. There are many different budgeting systems out there, but not all of them for you. You’ll learn more about budgeting for tips for beginners, like how to pick a budgeting system and how to stick to your budget. Read to find out more and see that easy budgeting is possible with prep work.
Budgeting for Beginners
Follow these six steps to make a personal budget to get started on creating the first one.
Decide Why You’re Budgeting
Preparing a budget starts with understanding why you want to budget in the first place. Define what your goals are with budgeting. It will make it easier to stick to when you have a purpose in mind. Some common reasons include:
- Become debt-free
- Finding ways to save money
- Reduce overspending in certain areas
- Stop the fights between you and your significant other with money
- Get out of the paycheck to paycheck way of life
- Save for a home, car, vacation, or other big purchase
- Get on track for long-term goals like retirement and college saving
Understand Your Current Spending Habits
Creating a simple monthly budget isn’t going to be realistic if you don’t handle what your current spending habits are. Track your spending for at least a month to determine where your money is going.
You can do this by writing down every purchase on a notebook, entering it on a spreadsheet, or using an app. Mint and PocketGuard are two such apps that can also link to your bank and credit cards. You can also use your previous credit card and bank statements to understand your current spending habits. However, if you don’t remember a certain transaction, you might not know what category an expenditure goes under, but at least it gives you the big picture.
Catch Those Irregular Expenses
Budgeting for beginners 101 includes remembering to account for irregular expenses. These are the day to day expenses that come up on a less frequent basis. These irregular expenses are usually a substantial amount of money, and you need to prepare it. Use a calendar to help identify those so that you consider them when you create your budget. Irregular expenses include:
- Holidays including Christmas, Easter, etc.
- Birthdays, weddings, and anniversaries
- Car registration and insurance
- Property taxes
- Insurance premiums
- Medical and veterinary exams
Identify and Add up All Your Income Sources
Tallying up all the income you bring in during a month will help when allocation it appropriately. If you have a lot of variable income because you work in commission-based sales or other reasons, then set yourself up with a “salary.” It is the base amount that you expect to earn in any given month. You can use the extra money to hedge against a month where you make less than expected. These common income sources include money from side jobs, income from full-time jobs, investment income, and alimony or child support.
Create a Personalized Financial Goal
You have your reason for budgeting, but you take it to the next level by creating an actual goal in this step. Studies have shown that goal setting increases the likelihood of achieving the desired outcome and increasing motivation. Make sure your financial goal is specific and includes a deadline. For example, if you want to save for a down payment on a car, your goal could be, “I want to save $10,000 for a new car within one year.”
Financial goals that a budget is used for are preliminary used for long-term outcomes. Saving for retirement, buying a home, starting an emergency fund, and paying off debt are examples of long-term goals.
Determine How Much to Save per Month
With your financial goal in mind, you need to break it down into realistic savings each month. For example, if we use the goal in the above example, then you would need to save $833.33 per month. This exercise gets you to think even more specific about what you’ll need to do to reach your goal.
How to Make a Personal Budget That Works
If you want to know how to make a personal budget that works, just make sure that you create the habit first. One of the things that people often struggle with is sticking to a budget. If you’ve gone through the effort of those six steps above without following through, it’s a waste of your time. Make sure you’re setting yourself up for success.
You do this by creating realistic financial goals. The realistic plan is one of the key budgeting tips for beginners that can help you stick with a budget. For example, let’s say that you want to save $1500 a month towards a down payment on a house. But you only have $1000 leftover each month even after cutting your expenses. Your goal was not realistic from the start. Instead, expand your timeline accordingly or lower your end goal so that it aligns with what’s possible.
Another common mistake that first-time budgeters make is that they don’t allow their budget to be flexible. Life happens sometimes, and you aren’t always prepared for them. A washing machine may break down, or unexpected medical expenses can happen, unfortunately. It might set you back on your savings goal for a few months, but don’t let it be your reason to stop budgeting.
If you find yourself spending more on groceries than you’ve planned, then cut other spending categories. And if you’re still overspending, it’s ok to go ahead and increase your grocery budget and adjust your budget accordingly.
Get your entire family involved in the budgeting process. After all, you’re creating a budget to help your family succeed financially. It will help instill the value of money in your children. A family budget will be everyone’s guide to how much everyone can spend to prevent debt. Please provide an overview of how much debt your family has and its impacts on your financial future.
Finally, make sure that you select the right budgeting method. The cash envelope system is effective for many budgeters out there. But if it doesn’t work for you, then find one of these budgeting tips for beginners.
Choosing a Budgeting Method
Managing a budget is made a lot easier when you use the right budgeting system. We’ll explain three of the most popular budgeting methods used today:
50 30 20 Budget Rule
This budget takes your paycheck (and your significant other’s) and splits it into three buckets: 50% of your “Needs,” 30% of your “Wants,” and 20% towards “Savings and Debt.” Your “Needs” include monthly things like mortgage/rent, groceries, insurance, and car payments. “Wants” are things that you’d like to have that you could go without, like eating out, fancier clothes, or taking a yoga class.
You can split the “Debt and Savings” category in the 50 30 20 budget rule according to your situation. For example, if you’ve got a lot of debt, you might prioritize more towards paying that down over saving.
Cash Envelope System
This easy budgeting system uses all your income and divides it up by your bills and expenses. The leftover money is then put into different expense categories like “Groceries,” “Eating out,” and “Entertainment.” The amounts are put into real envelopes with cash ideally because there’s a psychological effect of using cash to pay for things that makes people spend less. Once you run out of money in an envelope, you can’t spend any more in that category until the next month.
The idea behind this budget is that your income less expenses and savings should be equal to “zero.” The zero-based budget puts every penny towards your expenses, debt payments, and savings each month. You may have to revisit this detailed budgeting system each month to adjust for changes in income or expenses. If you end up with a negative balance at the end of a month, you must either increase income or reduce expenses to get back on track.
Test out these three different strategies and use the one that works best for your situation. If it makes it easier, download an app based on the budgeting system you want to use.