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Budgeting for beginners

Use these 6 steps to learn how to create a budget and take control of your money.

You know you need a budget, but sitting down and actually creating one is a whole other story. Luckily, we laid it all out in an easy-to-follow process. Here’s how to create a budget, and stick to it, in 6 simple steps.

How to create a budget in 6 steps

Follow these 6 steps to create a budget that works for your lifestyle and financial goals.

1. Find your budgeting method

First things first, think about how you want to budget. Do you want to track everything manually in a spreadsheet? Or do you want to use a budgeting app to help you automate the process? There’s no wrong answer. Just make sure to choose a method you think you’ll stick with – and dare I say – even enjoy.

If you’re a numbers person who loves a good spreadsheet, an automated software like Tiller Money may fit the bill. If you despise the thought of budgeting and want to automate the process as much as possible, a software like EveryDollar may be a better fit.

2. Tally up your income

Once you’ve decided on your budgeting method, add up your total monthly net income. This total could include your salary, interest and dividends, investment income, family allowances, child support, alimony and even income from your side gigs or hobbies.

3. Calculate your expenses

Create budgeting categories for all of your monthly expenses. Look at your receipts, past credit card statements and bank statements to find the average amount you spend each month on each expense category. Some common expenses include:

  • You may realize you have way more expenses than you thought when you start calculating them, but that’s okay. You can always adjust these categories as you get more in-tune with your spending.

    4. See where you stand

    To finish making your budget, you’ll need to add up all of the expenses you outlined in Step 3. In order to figure out how much money left over at the end of the month, you’ll then need minus those total expenses amount from your total income you calculated in Step 2.

    • If your budget shows a positive figure, then you’re spending less than you earn. Congratulations! Take that extra money and put it toward your savings goals and debt.
    • If your budget shows a negative figure, you’re living beyond your means and possibly accruing more debt. Evaluate your expenses to see what you can do without. Maybe you can shave $50 off your dining out budget or cut out the one subscription service you use the least. It doesn’t have to be anything drastic, but small changes will add up over time.

    5. Track your progress

    Set aside 15 minutes each week to import expenses into your budget, so you can see how much money you have left in each category. If you’ve overspent in one category (such as car repairs), move money from another category (such as dining out or fun money), to cover the difference. That way you don’t end the month in the red.

    If you use cash a lot, keep receipts so you know what you’ve spent your money on. Otherwise, you can log in to your bank and credit card accounts online to see how much you’ve spent and where.

    6. Be flexible

    No two months are going to be the same, so your budget needs to be adjusted regularly to match your changing finances. The interest rate on your mortgage may go up, straining your budget more than the previous month. Or, you may pay off debts and find you have more money to put toward your savings goals. Whatever it is, stay flexible and be willing to adjust your budget as often as necessary.

    Example: Budgeting spreadsheet

    Here’s an example budget showing many common categories, including student debt. The leftover money can be put towards debt or any occasional expenses as they arise. After the debt is payed off, leftover money plus the money that used to be budgeted for debt can be used to build up a 3-month emergency fund.

    Example monthly income and expenses

    IncomeExpenses
    Salary$4,000
    Rent-$1000
    Student debt repayment-$500
    Groceries-$550
    Dining out-$250
    Car loan-$305
    Utilities-$220
    Internet-$50
    Bank fees-$15
    Miscellaneous expenses-$150
    Cat expenses-$100
    Car insurance-$130
    Cell phone bill-$75
    Gas for car-$145
    Subscriptions-$50
    Vacation fund-$200
    Total income and expenses$4,000-$3,740
    Leftover money $260

    Tips and tricks to consider before you create a budget

    It can help to keep these tips in mind when you’re thinking about how to create your budget:

    • Think long-term. You’ll most likely budget for the month, but remember that improving your finances is a long term commitment. You may not see results at first but keep at it. The reward will be worth it.
    • Set realistic expectations. The first month your budget is in place is a good barometer of how realistic it is. If you can’t stick to it in the first month then you may need to revise it.
    • Keep it simple. Less is more when it comes to budgeting categories. Instead of having a category for every little expense, create your main categories, then one “Miscellaneous” category to catch the ones you forgot to budget for.
    • Make reviewing your budget part of your routine. Get in the habit of reviewing and adjusting your budget at least once a week. Maybe you can do it with your morning coffee on Sundays as you begin to mentally prepare for the next work week.

            Advantages and disadvantages of budgeting

            Here are all the reasons you may want to start a budget and things to watch out for:

            Pros

            • Helps identify poor spending habits. You can’t change your bad money habits if you aren’t even aware of them. A budget shines a light on the darkest part of your spending and helps you create a plan to fix it.
            • Empowers you to reach your goals. It’s possible to reach your savings or debt repayment goals without a budget, but you’ll get there a lot quicker if you have a budget — or roadmap — to follow.
            • Lowers financial worry. When you have a budget, you don’t have to stress every waking moment about whether you’ll have enough money to pay a bill or save for a goal. Your budget will tell you that.

            What to watch out for

            • Overwhelming at first. Looking at your expenses for the first time may be stressful, overwhelming or even embarrassing. But remember, knowledge is power.
            • Takes time. You may not see amazing financial results the first month you budget. It usually takes months of evaluating and adjusting to feel like you’re making progress toward your savings goals and lowering your debt.
            • Involves trade-offs. You only have so much money each month. Inevitably, you’ll have to make tough choices about where you should spend that money.

            How to choose a budgeting method that works for you

            There are a few different methods out there that can help guide how you create a budget. This table showcases the different types of budgeting methods and how they compare. Use it to decide which process may work for you.

            TypeBest forHow it works
            Zero-based budgetingThose who want to know how they’re spending every single dollar they make
            • Take all income and allocate it toward expenses, debt and savings
            • Make sure income minus expenses equals zero each month
            • Can be automated or manual (manual would be tedious)
            Envelope budgetingThose who need help curbing spending but don’t want to track every purchase
            • Set a spending limit for each category
            • Fill envelopes with money
            • Once envelope runs out, you can’t spend any more money in that particular category
            • Can be automated or manual
            50/30/20 budgetingThose who are new to budgeting or want to budget quickly
            • Allocate 50% of take-home pay to necessities, 30% to wants and 20% to savings and debt
            • Don’t track individual expenses, just make sure you stay within certain range
            • Must be done manually
            Kakeibo budgetingThose who want to take a more mindful approach to budgeting using a Japanese technique
            • Set aside money for savings first
            • Split remaining funds between Survival expenses, Optional expenses, Cultural expenses and Extra expenses
            • Tally up expenses at the end of the month to see how you did
            • Can be automated or manual

            How to create a budget when you’re short on time

            An app like Mint is great for budgeters who are short on time. It has 2 main benefits:

            • It connects to your financial accounts, so transactions automatically get deducted from your budgeting categories as they import.
            • Mint will automatically suggest budgets based on your spending habits and will send you alerts when bills are coming due.

            What is budgeting?

            Budgeting is the act of tracking what income is coming in and what money is going out each month. So it basically tracks your savings and spending expenses. It’s the best way to get an understanding of the way you spend, the way you save and then identify ways to improve. A budget can help, no matter what your financial goals are.

            One of the main purposes of budget planning is to know where your money is going each month. When you’re able to account for your spending, you can learn how to better manage your bills and living expenses. It’s also much easier to pay off debt and avoid accumulating it in the first place. If you have savings goals, like saving up for down payment on a house or that dream vacation, a budget is one of the best first steps you can take to get there.

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            Why is budgeting important?

            There are plenty of reasons why budgeting is important, but here are some of the main ones:

            • Spending awareness. If you don’t have a budget, you may be surprised by how much you spend on a daily basis. Things like a bottle of wine or new clothes add up. A budget shows you exactly how much you’re spending and what you’re buying.
            • Improves financial control. People who budget regularly don’t count down the hours until payday. They’ve forecasted their expenses and managed their money so they have peace of mind.
            • Makes saving easier. Budgeting makes it easier to identify ways to save because you always know how much you’re spending. It also makes it easy to track progress toward your savings goals.

            Bottom line

            Far too many individuals don’t have a clear idea of where their money is going. They just know they never have enough leftover at the end of the month. Budgeting puts you in control of your money and makes it much easier to track spending habits, reach savings goals and pay off debt.

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