Budgeting For Beginners: How To Create A Budget
Budgeting might seem intimidating, but a few savvy steps can be the key to unlocking financial security and accomplishing your money goals. Finding success in budgeting is only as complicated as you make it — so do not stress!
By following this simple guide, you can start budgeting in no time. And a little spoiler alert before you continue — creating a budget is surprisingly easy. The challenging part is committing to it!
Step 1: Check Your Income
The first step in creating a budget is calculating your monthly income. That is, how much money flows into your household each month. The prime source for you is your pay for your job. You may be paid once a month, bi-weekly, or by another method; hence, make the calculation accordingly.
If you have other sources of income besides the wage you get, take them into account. It could be investments, extra cash from your side hustles, state benefits, etc. Whatever income you get per month, you need to add it to your wages to get a correct total.
In case your wages or the income you get from other sources fluctuates — no need to overthink it. Just determine your average payment over a few months (six months is the magic number here) and add that to the income total.
Remember, budgeting at its core is finding the connection between what you earn and what you spend. Without carefully calculating your income, your budget planning could be unsuccessful.
Step 2: Calculate The Expenses
The other crucial part of creating a budget is calculating your monthly expenses. Expenses are the opposite of income — how much money is leaving your household. Expenses include each thing you spend money on. Be it rent, subscriptions to entertainment services such as Netflix, a daily cup of coffee, etc.
Calculating the expenses is very similar to calculating your income, the same thing you did on the first step. Check out your bank statements from the past few months to paint a picture of where you generally spend your money.
Once that is done, categorize your spending into different categories. For example, money spent in coffee shops, on eating your lunch at a restaurant, and on that irresistible ice cream cone that you keep on buying on your way home from work could fall into the “Eating out” category. The number of categories you create is solely up to you, and you need to figure out what works best for you.
Having too many categories may be confusing, whereas not enough will prevent you from better understanding where the money is drained. When you find the sweet spot, you can see which expenses you can lower or cut altogether. Perhaps that daily cup of coffee is not worth it, even though it’s just a few bucks. Over time, these small expenses accumulate and can put a completely unnecessary dent in your budget.
Now, once you have your income and expenses calculated, subtract the expenses from your income to check the overall status of your current budget. If the number you get is above zero, that is a good sign. It means that you are on the right track. However, if the number is below zero, you should consider taking budgeting seriously.
Step 3: Track Your Spending
Having a general idea of where your money is going is not enough. Understanding the categories of your expenses is a somewhat theoretical approach. You must convert it into a practical by carefully tracking your spending.
Tracking your spending means taking every purchase and dollar spent into account and marking it accordingly. Each time you spend some money, take note of how much you paid, what it was, and into which category this expenditure falls. By doing this, you can ensure that you are staying on track toward your personal finance goal for which you are creating this budget in the first place.
There are numerous ways to track your spending, but the easiest one is by using budgeting apps. They are available on most operating systems and often are free to use. You can link your financial accounts (credit cards, bank accounts, etc.) to them, and they will automatically log your purchases, making them easier to categorize. It sure does sound better than manually filling out an Excel spreadsheet.
Step 4: Decide on a Budgeting Plan
Similar to creating categories for expenses, deciding on a budgeting plan is something you will have to do yourself. Although many time-tested plans already exist, they are very different from each other. These are a few most well-known ones; think about which fits your lifestyle best and go for it!
The envelope system has nothing to do with mail or post offices, but it does include envelopes! In this system, you take an envelope for each spending category you had created earlier and fill it with cash allotted to that particular category.
Once you spend all the money in the envelope, you are not allowed to spend any more on that particular category. For example, if you fill the “Going out” envelope with $100 and spend it all quickly, you can no longer go out and party.
Although it may sound rough on paper, this budgeting plan has perks. With it, you are guaranteed to spend only what you had allocated for that particular expense category. It may also push you to use less than anticipated, and those envelopes may be full of savings at the end of the month.
The percentage system, also known as the 50/30/20 budget, is a relatively simple but effective one. If filling envelopes does not sound like a good idea, this system might be perfect for you. In this system, you spread your income into three different percentage parts — 50%, 30%, and 20%.
50% of your income in this system should be used for necessary and unavoidable expenses. These include bills, food, rent, debt payments, etc. Everything that you MUST spend your money on.
30% of your income should be used for fun things like going out, watching movies at the cinema, and so on. In other words, the “wants” rather than “needs.”
Finally, 20% of your income should be used for savings. This part of your income goes somewhere where you can not touch it. You could use it to build an emergency fund for a rainy day or for future investments to grow your savings.
Zero-based budgeting is a more advanced budgeting plan that requires meticulous attention to detail and does not tolerate any mistakes. Adopting this system means that every single dollar from your income is fully used for something, leaving you with a zero each month.
Essentially, it is similar to the envelope system but not just cash-oriented. If you adopt this budgeting plan successfully, you will be sure to know how you spend each penny in your wallet and will be able to make adjustments quickly and without any negative repercussions.
As noted, this system requires a lot of attention since even minor miscalculations could lead to a negative budget and make the way to your financial goals longer.
Step 5: Stick to the Plan!
Although creating a budget does help you take control of your finances, it is no secret that keeping to it can feel restrictive. After all, instead of spending your money however you wish without much thinking, you now have to keep track not to overspend what you had allocated.
This also requires a lot of commitment, as without it, there is no point in having a budget at all. These disadvantages may make you lose interest in sticking to the budget and falling back to potentially reckless spending.
If any of these negative ideas pop into your mind, think about the goals that you had set for yourself and why did you create a budget in the first place. The feeling of being slightly restricted is a small price to pay for control over your finances and overall financial stress reduction.
Constantly being worried about the mounting debts and lack of emergency funds is way worse than thinking for a bit before making a purchase. After all, without budgeting, those worries will never go away, and your financial goals will remain out of reach. If sticking to your plan starts to seem meaningless, keep this in mind. All of this is for your good and a better, stress-free future!