Budgeting for Beginners

So you’re ready to create your first budget. Or maybe you’ve tried budgeting in the past but never stuck with it consistently, and you’re ready to try again. Budgeting is a new skill; just like any new skill, it takes a little time and practice.

Good systems and a little know-how can make budgeting even easier, and that’s what we’re digging into today.

Once you start budgeting regularly, you may find you have more freedom over your spending decisions.

Why do you need a budget?

First, a budget can help you work towards financial stability and away from living paycheck to paycheck. You’ll be able to save for your short-term and long-term goals and reduce your overall financial stress. The most important reason to have a budget is to let you control where your money goes.

Knowledge is power. Knowing exactly what money is coming in and going out each month is the foundation for creating a solid budget.

How do you create a budget for the first time?

1. Write down all your income.
   The first step of building a budget is writing down all your income. Our Monthly Budget Worksheet will walk you through this. List your household net income from all sources. If you receive seasonal or periodic income, calculate what you get each year and divide by 12 to get a true monthly snapshot. If you are uncertain about any figures, be conservative with your estimate. Having money left over is better than being caught without enough to pay your bills.
2. List all your expenses.
   Again, our Monthly Budget Worksheet is a good starting point. Remember to list debt payments and savings contributions. Also, don’t forget about expenses that come up occasionally, such as gifts, trips, and car maintenance costs. To calculate what you spend per month, divide the total of what you spend per year by 12. Even though you may only have these expenses once or twice a year, you can set aside money every month to make them easier to pay when they occur. Be realistic about what you’re spending. Today, many tools and apps allow you to track expenses easily.
3. Subtract your expenses from your income.
   Take a look at the results. This number is called your disposable income. If there appears to be money left over, but you feel like you're living paycheck to paycheck, you may want to re-examine your expenses and ensure you've accounted for everything. Continue to track your monthly expenses to confirm that these numbers are accurate.
4. Choose a budgeting method such as the 50/30/20 rule.
   Once you know what money is coming and going each month and what’s leftover to work with, you can introduce a budgeting method like this one where you put 50% toward needs, 30% toward wants and 20% toward paying down debt and building savings.

How to track your budget

Your first budget won’t be perfect. The most important thing is to start budgeting, and adjust and learn as you go. Expenses will fluctuate. You’ll encounter unexpected costs some months, while others you may even encounter the happy decision of what to do with unexpected bonus income.

Tracking is the key to success. Over time, it will become second nature and get easier. It's a good idea to update your budget monthly (or weekly) as your projections become more accurate.

It’s a good idea to update your budget monthly at a minimum. You may prefer weekly, so try both and see what you like best.

How do you track your budget? A lot of people like using spreadsheets, shared online documents, or good old pen and paper. Today, many apps are available on the market that can help your budget, too.

Set a reminder for yourself to update your budget each month, and stick to it. Over time you’ll be glad you did!

Tips for controlling spending

If you find that your expenses seem to snowball, or you’re not sure how your monthly coffee bill just hit $250, here are a few strategies for controlling spending. We call these "spending speed bumps" because they provide ways to slow down and pause before handing over money.

Use the gift card method. Put a pre-determined amount of money on a gift card each month. For example, let’s say you enjoy a daily coffee at Starbucks, but this sometimes turns into a bigger monthly expense than you’d like. Put $50 on the card at the beginning of the month, and when it’s gone, it’s gone. You’ll wait until the next month to reload it. This trick allows you to better plan for the “coffee” line item on your budget.

Use cash for personal expenses. If you ever feel like swiping a credit card feels a bit like playing with Monopoly money, you’re not alone. Try getting good hard cash out of your ATM before making purchases that fall in the “want” category. This way the money feels more tangible, and you’ll physically see it leaving your hand.

Downgrade your Amazon account. Yes, two-day shipping is nice but can also encourage unnecessary spending. Consider downgrading to a regular account and only clicking “buy” when it’s something you really need.

Unsubscribe from promotional emails. Receiving dozens of advertisements a day in your email can make it tempting to take advantage of the latest sale. Rid yourself of this temptation by unsubscribing from store and promotional emails. Out of sight, out of mind.

Cool your shopping cart. If you’re the kind of person who enjoys shopping online, go ahead and fill your cart. When it’s time to complete the purchase, instead of buying right away, let your cart cool off. Wait a few hours or a day, and when you come back to your cart with fresh eyes, you might be better able to decide if you really need these items.

Find an accountability partner. Find a friend or family member who can help keep you accountable when it comes to your daily coffee fix or late-night online shopping. Check in with them, and keep each other accountable as you work toward your budget goals.

Creating a budget is not a one-and-done activity. Your budget is a living, breathing, evolving part of your financial stability. Get started today and stick with it. Pretty soon, you’ll be a pro at making monthly updates and tweaks to your budget, and you’ll have a complete financial view of what you can spend — giving you the financial freedom and control you’re looking for.