How to Budget: A Simple Guide for Beginners

Budgeting is the process of planning how you will spend your money each month. It can help you achieve your financial goals, such as saving for a vacation, paying off debt, or building an emergency fund. Budgeting can also help you avoid overspending, reduce stress, and improve your money habits.

But how do you start a budget? And how do you stick to it? In this blog post, we will show you how to budget in seven easy steps.

Step 1: List your income

The first step to budgeting is to know how much money you have coming in every month. This includes your salary, wages, tips, bonuses, commissions, or any other income sources. If you have an irregular income, you can use the average of the last few months or the lowest amount you expect to earn.

To list your income, you can use a spreadsheet, a paper and pen, or a budgeting app like [EveryDollar]. Add up all your income sources and write down the total amount. This is your monthly income.

Step 2: List your expenses

The next step is to list all the things you spend money on each month. This includes your fixed expenses, such as rent, mortgage, utilities, insurance, car payments, and debt payments. It also includes your variable expenses, such as groceries, dining out, entertainment, clothing, gas, and personal care.

To list your expenses, you can use the same method as you did for your income. You can also look at your bank statements, receipts, or credit card bills to see where your money goes. Categorize your expenses and write down the amount for each category. This is your monthly spending.

Step 3: Subtract your expenses from your income

The third step is to compare your income and your spending. Subtract your total expenses from your total income. This will give you your monthly cash flow.

If your cash flow is positive, it means you have more money coming in than going out. You can use this extra money to save, invest, or pay off debt faster.

If your cash flow is negative, it means you are spending more than you earn. You will need to make some adjustments to your budget to avoid going into debt or dipping into your savings.

Step 4: Set your financial goals

The fourth step is to decide what you want to achieve with your money. These are your financial goals. They can be short-term or long-term, such as saving for a vacation, buying a house, retiring early, or becoming debt-free.

To set your financial goals, you need to be specific, measurable, achievable, realistic, and time-bound. This means you need to define what you want to accomplish, how much money you need, how long it will take, and how you will track your progress.

For example, instead of saying “I want to save for a vacation”, you can say “I want to save $3,000 for a trip to Hawaii in 12 months”. This way, you have a clear target and a deadline.

Step 5: Allocate your money

The fifth step is to assign a purpose for every dollar you earn. This is where you create your budget plan. You need to decide how much money you will spend on each expense category and how much money you will save or invest for each financial goal.

One simple way to allocate your money is to use the 50/30/20 rule. This rule suggests that you spend 50% of your income on needs (such as rent and groceries), 30% on wants (such as dining out and entertainment), and 20% on savings and debt payments (such as emergency fund and credit card bills).

Another way to allocate your money is to use the zero-based budgeting method. This method requires that you give every dollar a job until your income minus your expenses equals zero. This means that every dollar has a specific destination and nothing is left unaccounted for.

You can use any method that works best for you and fits your lifestyle. The important thing is that you stick to the plan and don’t spend more than you earn.

Step 6: Track your spending

The sixth step is to monitor how well you are following your budget plan. You need to keep track of every transaction and compare it with the amount you allocated for each category. This will help you see if you are on track or if you need to make any adjustments.

To track your spending, you can use various tools such as cash envelopes1, spreadsheets2, apps3, or online banking. Choose a tool that is convenient and easy for you to use.

You should track your spending daily or weekly to stay on top of your finances and avoid overspending. You should also review your budget at the end of each month and see how well you did.

Step 7: Adjust your budget

The seventh and final step is to tweak your budget as needed. Your budget is not set in stone. It is a flexible and dynamic tool that you can change according to your circumstances, preferences, and goals.

You may need to adjust your budget if your income or expenses change, if you achieve or set new financial goals, or if you encounter any unexpected events or challenges.

You may also need to adjust your budget if you find that it is not working for you or that it is too restrictive or too lenient. You may need to cut some expenses, increase some savings, or add some fun money.

The key is to find a balance between your needs, wants, and goals. Your budget should reflect your values and priorities and help you live the life you want.

Some common budgeting mistakes:

Budgeting is a useful skill that can help you manage your money and achieve your financial goals. However, budgeting can also be challenging and frustrating if you make some common mistakes. Here are some of the most common budgeting mistakes and how to avoid them:

• Not having a budget. This is the biggest mistake you can make, as it means you have no plan for how to spend and save your money. Without a budget, you are likely to overspend, go into debt, or miss out on important financial opportunities. To avoid this mistake, you need to create a realistic and flexible budget that suits your income, expenses, and goals. You can use a spreadsheet, an app, or a paper and pen to track your income and expenses and allocate your money accordingly.

• Guessing at monthly costs. Another common mistake is to estimate your monthly expenses without checking the actual numbers. This can lead to underestimating or overestimating your spending, which can throw off your budget and cause you to run out of money or waste money. To avoid this mistake, you need to track your actual spending for at least a month and use the data to adjust your budget accordingly. You should also account for inflation and rising prices, which can increase your costs over time.

• Being too strict or too lenient. A good budget should balance your needs, wants, and goals. However, some people make the mistake of being too strict or too lenient with their budget. Being too strict means cutting out all the fun and entertainment from your budget, which can make you feel deprived and unhappy. Being too lenient means spending too much on unnecessary or impulsive purchases, which can derail your savings and debt payments. To avoid this mistake, you need to find a middle ground that allows you to enjoy life while still being responsible with your money.

• Not saving for emergencies. One of the most important reasons to have a budget is to save for unexpected events or emergencies, such as medical bills, car repairs, or job loss. However, some people make the mistake of not saving enough or not saving at all for these situations. This can leave them vulnerable and unprepared when they face a financial crisis. To avoid this mistake, you need to set aside a portion of your income every month for an emergency fund. Ideally, you should have at least three to six months’ worth of living expenses in your emergency fund1.

• Not revisiting or adjusting your budget. A budget is not a one-time thing. It is a dynamic tool that needs to be updated and revised regularly. However, some people make the mistake of sticking to the same budget for months or years without making any changes. This can cause them to miss out on new opportunities, goals, or challenges that may arise in their life. To avoid this mistake, you need to review your budget at least once a month and make any necessary adjustments based on your current situation. You should also review your budget whenever you experience a major life change, such as getting married, having a baby, moving to a new place, or changing jobs.

Conclusion

Budgeting is not a one-time task. It is an ongoing process that requires commitment, discipline, and patience. But it is also rewarding, empowering, and liberating.

By following these seven steps, you can create a simple and effective budget that works for you. You can take control of your money and achieve your financial dreams.

If you need more help or guidance on how to budget, you can check out some online courses or videos such as [Credit 101] by Khan Academy or [How to Build Credit] by NerdWallet. These resources can help you understand the basics of credit and how to use it wisely.