You know what used to scare me? It's something that probably scares a lot of people who never learned how to start a budget (like me).
Here it is:
Logging into my online banking account. Yep.
Why was I scared of this?
Because I never used to keep track of how much money I was spending (I also used to waste a lot of money on fast food).
I'll admit that there are still times when I overspend a bit, especially around Christmas time (too many gifts!). But since establishing a budget, I know exactly what is going to be on my credit card bill each month and have no stress when logging into my online banking account.
I want you to feel the same way, stress-free.
So:
What Is A Budget
Simply, a budget is a plan for your money.
See:
Without a budget, you're going through each month blind and hoping you still have enough to pay rent at the end of the month. Having a budget will allow you to accomplish financial goals, eliminate debt, and have fun too! Yes, that's right you can still do fun things when you have a budget.
Think about this:
What if your car broke down tomorrow, would you have money to fix it?
What if you lost your job, would you have enough in the bank to pay rent while you find a new one?
I don't want you to have to worry about horrible things like this happening because honestly, your car probably won't break down tomorrow and you probably won't get fired from your job either, but it could happen one day, and I want you to be prepared in case that day ever comes.
So, how do you prepare?
Learn how to start a budget of course!
But first:
Why You Need to Start a Budget
Everyone will benefit differently from budgeting; some may just want to feel more in control of their finances, others may be doing it to eliminate their debt faster. If you're reading this you probably already have your reasons for starting a budget.
However, if you're still unsure of the benefits of budgeting, here are three big ones:
- You'll be prepared for tough times – Life is a … you know the word. One of the best things you can deo when you start budgeting is to establish an emergency fund. Car problems? Not a problem at all because you've already prepared for it.
- You'll accomplish your goals faster – Do you want to go to the Bahamas or see a concert but you never seem to have the money to do so? Create a spot in your budget to start saving money each month until you reach your goal.
- You'll never wonder where your money went – If you find yourself wondering where your money went or how your credit card bill is so high, with a budget, you will know the answers to those questions.
How to Start a Budget: Budgeting For Beginners
Even if you've never budgeted before you're doing better then 90% of people by taking action and learning how to start a budget.
Step 1. Figure Out How Much You Make
Can't make a plan for your money if you don't know how much you have to work with.
If you have a fixed income (same amount every month), this will be easy for you, just add up your paychecks.
If you don't (commission based pay, tips, etc.), try to estimate the minimum amount you make each month.
So here's an example:
| Source | Income |
|---|---|
| Job | $1,500 |
| Blog | $250 |
| Freelance Writing | $200 |
| Total Income: $1,950 | |
Step two time!
Step 2. Set Goals For Your Money
This used to be one of the last steps in this budgeting guide, now it's one of the first.
Why?
Because this is one of the most important steps when starting a budget. It's one of the main reasons to start a budget in the first place.
To accomplish financial goals.
That sounds lame but it isn't. Your goal could be to save $1,000 for a trip to Thailand, is that lame?
Try to come up with a mix of short-term (less than a year) and long-term goals (over a year) that you would like to accomplish financially. Doesn't matter how big or small just write them down.
Here are some examples to help you get started:
- Set up an emergency fund. An emergency fund can be a lifesaver when something unexpected happens like getting laid off. You should aim to make this emergency fund big enough to last 6 months to a year of unemployment.
- Pay off debt (if you have any).
- Save for retirement.
- Save up for something you've wanted for a long time, could be a vacation or a new TV (just because you're budgeting doesn't mean you can't have fun).
- Investments. Now that you're saving some money you can start making it work for you.
After you come up with a couple goals you're happy with, move on to the next step.
Step 3. Add Up Your Fixed Expenses
Fixed expenses are the expenses that stay the same every month. This includes things like car payments, rent/mortgage, and bills. These expenses are not easily changed so you'll have a hard time finding savings here.
Example:
| Expense | Cost |
|---|---|
| Car Payments | $200 |
| Rent | $800 |
| Total: $1,000 | |
Step 3b. Subtract Your Fixed Expenses From Your Monthly Income
Since our monthly income is $1,950, we're left with $950 after paying for our fixed expenses. We will call this $950 our true budget.
True Budget = Income – Fixed Expenses
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Step 4. Figure Out Your Variable Expenses
Next thing you need to do is add up your variable expenses. These are the ones that change each month and include things like entertainment, dining out, clothes, and all that fun stuff.
This is where you cut back and find savings if you need to.
How?
When you're looking through your bank account(s)/credit card bills and adding up your variable expenses, you'll find expenses that fit into two categories:
Needs and wants.
Your needs could be things like gas and groceries. You can find some savings here if you really need to.
Your wants could be things like a music subscription, dining out, and Netflix. You can find more savings here, you just have to make some sacrifices. For example, if you dine out a lot, try cooking at home more.
Related: Apps That Pay You To Shop
Here's an example of variable expenses:
| Expense | Cost |
|---|---|
| Gas | $100 |
| Groceries | $200 |
| Dining Out | $100 |
| Movies | $50 |
| Total: $450 | |
Step 4b. Subtract Your Variable Expenses From Your True Budget
So after adding our variable expenses and subtracting them from our true budget, we're left with $500 extra to put towards our goals. If you have a lot of extra money like this, great job! This means you're already doing a good job managing your money. Continue to the next step.
If you are breaking even you've got enough money to survive, but nothing to put towards goals. You may want to take a look at your variable expenses and try to adjust so you have some extra income for the next step.
If you have a negative number, then you're losing money every month which is unsustainable. Adjust your budget for your variable expenses or try to increase your income.
Check out these personal finance apps if you want to track your spending digitally. The Mint app is a great free option which categorizes all of your spending for you.
Step 5. Distribute the Rest
In step 2 we made financial goals, now it's time to distribute our extra income into those goals.
You want to make sure each dollar you make has a purpose, so try to use up every dollar left in your budget!
Example:
| Goal | Monthly Contribution |
|---|---|
| Retirement | $150 |
| Pay off debt | $200 |
| Save for vacation | $100 |
| Invest | $50 |
| Emergency Fund | $50 |
| Total: $500 | |
We've now assigned every dollar in our budget a job. Things will obviously fluctuate as life is full of many surprises, but at least we have a general plan for our money.
Step 6. Review
Now that you've done all the hard work, all you need to do is review your budget every once in a while (every month is best) and continue to update and maintain it.
Here are some examples of why you may need to update your budget:
- Your goals will change, and you'll need to update them and come up with new ones. For example, maybe you reached your goal for your emergency fund, you can now put that money towards a different goal.
- New income – If you're making more then you were when you set up your budget, you'll want to find a place to fit that extra money into your current budget.
- New debt – Life sometimes throws obstacles at us and sometimes we need money to get around them. No big deal if you're prepared.
I recommend having a specific day, maybe the first of each month, to review and update your budget. This will help you stay committed to your budget and keep you on track with your financial goals.
Conclusion
Congratulations! Now that you know how to start a budget there's nothing to stop you from starting your own.
The truth is, learning how to start a budget is the easiest part of budgeting. ACTUALLY taking action and doing what it takes to start your budget and stick with your budget is the hard part.
Remember:
Budgeting won't be easy.
If you're a big spender it will take a while to get used to tracking your spending every month. I recommend these personal finance apps if you're looking for an easier way to track your expenses, but I do suggest that you give it a try on your own first so that you get a feel for doing everything manually.
If you have a hard time sticking to your budget, make sure you schedule a day every month to look it over and make changes. If you don't do this you'll just fall back into your old ways of being budgetless.
Do you have any budget tips for beginners? How did it go when you started budgeting for the first time?
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I really like your Blog, I’m trying the 100 days Envelope challenge. Whish me luck!
I’m From Brunei.
Thank you and good luck with the challenge!
Hi Dylan Houlihan! Thank you so much for your six easy steps On How To Start A Budget. I was not looking for this type of information when going onto web. I just happened into it and found that your subjects were very interesting. I have already written the six steps with my personal list to follow for budgeting my money. I have no credit card debt and owe little to nothing on one last thing that will be all paid end of May 2021. I am excited to start putting to use your six easy steps, and cannot wait to look back a year from now to see how much I was able to accomplish by doing a budget and sticking with it. Thank you! Thank you! Thank you!
Thanks for your comment, Sharma! Really glad you found the guide helpful 🙂 Good luck with everything.