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Beginner's Budgeting 101: How to Start Budgeting for the First Time

Beginner's Budgeting 101: How to Start Budgeting for the First Time

 

Today’s Household Finance Lesson: Secret Reasons Why Budgeting Is Important 

 

What is a budget? What is budgeting? A budget is defined as, “an estimate, often itemized, of expected income and expense for a given period”. In other words, a personal budget is an estimate of the income and expenses you will have in the near future. You can also think of a budget as a type of game plan for your money. A home budget helps you create a plan for how to spend your money. Want to take control of your finances and save money? This is the budgeting beginner’s guide for you. Learn how to be your own budgeting planner. 

Budgeting may sound scary, but we promise you it is not. Some people even find that making a budget helps them feel more in control of their money. They feel a sense of confidence in seeing their finances laid out in front of them. It can take a little time, but realistically you only need to make one once a year. Budgeting is maintenance for your money and personal financial health. Think of it the same as going to the dentist or getting an oil change for your car. 

 

Why is Budgeting Important? 

For starters, there are a lot of potential negatives to not budgeting. If your expenses are consistently more than your income, your debt could be increasing. Without a budget, you are kissing money goodbye. Budgets help you identify ways to save money each month. You could be losing money each month with your refusal to make a budget.

A family budget is important because it ensures that you have enough money for the important things you need. Following a budget, or spending plan, will help keep you out of debt. If you currently have debt, following a budget can help you pay it back. Having a personal budget can help you obtain your goals. If you are trying to save money for a car or emergency fund, having a budget can help you set and achieve goals. 

Budgeting has other benefits too. Making a budget can help shine a light on bad spending habits. With that information, you can readjust your expenses to have better spending habits. Having a personal budget will also help if you decide to ask for a raise or change careers. 

 

How to Plan a Budget  

Making a budget is really easy. We will break down how to make a budget in 6 easy steps. Keep in mind that most budgets are planned for a month of time. Some people will budget their whole year, or even each individual week. In this guide, we will be primarily looking at altered monthly budgets. We will be looking at both the monthly and annual expenses you have. To begin, you will need to create a spreadsheet. You can use, Excel, Google Sheets, or a different spreadsheet app. We will be doing some easy math. Having a spreadsheet will make calculating the numbers even easier. Together, we will be making a monthly budget spreadsheet. 

Start by looking at your income. You will need to know your after-tax income each month. You can calculate these two different ways. You can look at your after-tax income from last year and divide it by 12. Or, you can add up your income each month, and calculate the average. Do you remember how to calculate averages? Add up your paychecks from the last six months, and then divide that number by six. You could do the same for 12 months, but instead of dividing by six, you would divide by 12.  

Next, you will look at your necessary monthly living expenses. Put rent, utilities, debt, and your other monthly bills on there. Only put the bills that you need in order to stay alive and get from work to home. For example, if you are making car payments, you would put it on this list. After all, you need your car to commute to and from work. You also need to add up your monthly grocery expenses. Know how much money you spend on groceries each week? Multiply that number by 4.5 to estimate about how many weeks are in a month. Then do the same calculations for your car’s gasoline. If you have pets, you will want to include pet food and kitty litter on this list. Pets need food to live. 

For the second step, we will look at our necessary annual living expenses. There are necessary items we pay for only once or twice a year. If you pay car or homeowners insurance, you will include it on this list. Any sort of insurance you are currently paying for will go on this list. You will also need to include maintenance expenses on this too. Add your annual car maintenance costs to this. Add doctor bills to this too. How much does it cost you to go to the dentist or eye doctor? Are there any other necessary yearly expenses you can think of? Once you have them all on this list, simply divide by 12. Add this number to the monthly living expenses from earlier. Consider other expenses that you need in the house, but do not have to pay for frequently. How often do you have to buy things like detergent, shampoo, or tissues? 

Next, we will consider the almost necessary wants. Do you have hobbies or anything else that you are passionate about? Put it on this list. If you go to the gym regularly, and do not plan to stop, you will put your monthly gym membership here. If you draw or make crafts, you can calculate your average spend each month and put it here. You could include Wi-Fi or streaming services here as well. These wants are ones that are important to you. This list will change from person to person. I once knew a person that would have put about $35 aside for chicken nuggets each month. I would put my Adobe bill on this list because I use those products daily. We all have different things that we feel like we need in our lives. 

Step four consists of looking at your luxury items. This includes other wants that you do not really need. These are the trips to the spa, the spontaneous coffee runs, and the other here and there expenses that you have. These are items that you enjoy buying but could go without for a month. Groceries would have gone under needs, but if you go out to restaurants, this is the section those expenses would go under on your sheet. Calculate how much you spend on these items each month. You can look over your credit card history to see how much you spend on these each month. Similar to income, you can calculate and average to these costs. Add up your last six months of impulse buying and divide the number by six.

The next step is looking at your savings goal. Are there things you are currently saving up for? An emergency fund can come in handy when you are in a pinch. Here is where you will calculate how much you need to save each month in order to meet your goal. Are you working on saving up a few hundred dollars or several thousand? Divide up how much money you will need to save, by how many months you have until you need the money. If you have been working on that goal, and are currently saving, you should be proud. Be sure to write that amount down on the sheet. Way to go! Just subtract that from your goal so you can see how much more you need to save. 

The final step is looking at your budget and reviewing your expenses. Are there expenses that you could do without or decrease? It is easy to say that you will spend less on your wants and luxury items. It can be hard to actually keep to that plan though. Work on saving money in each category. Do not be afraid of trying to save money on your monthly bills. You might be pinching pennies in some of them, but every bit helps. Try to make small changes to decrease your monthly utility costs. Shop around for insurance and get a better rate. Can you find a different gym membership or get rid of one streaming service? Even going out to eat one less time each week can make a difference. Making small cuts to several different expenses can sometimes be easier than cutting out one expense entirely. 

Ultimately though, there are different types of budgets you can follow. Budget planning looks different for everyone. In the last section, we went over how to plan a budget. In this next section we will look at common budgets to follow. The principles will still stay the same. You will need an excel sheet, and you will use some of the values you just calculated in the last section. 

 

Budgeting Examples   

We will start with easier budgets and get more complex from there.

The beginner’s budget. This budget just looks at a quick snapshot of your expenses. Rather than planning out your finances in-depth, this budget keeps things simple and flexible. Start by looking at your monthly income. Budgeting by paycheck can help make sure your expenses are less than your income. Next, you will look at your necessary monthly living expenses. We talked about how to calculate both of those earlier in the “How to Plan a Budget” section. Once you have those numbers, compare your monthly income to your monthly expenses. It is up to you to decide how to spend that remaining money. Do not get too excited yet. All that money is not just fun money. Some will be for fun, and some will be necessary for unexpected expenses. You will also need that money to pay for doctor appointments, repairs, and other emergency expenses. Do not forget to save up some for an emergency fund and even retirement. This budget is the most flexible of the three, and it only takes about 30 minutes to create.

The 60/20/20 Budget. This budget is next on our list because it is relatively easy to follow. This budget also starts by looking at your monthly income. However, this budget process starts without looking at your current expenses. The idea is that you spend 60% of your income on essentials like food and rent. Next, you spend 20% on items that you want. Finally, you take the remaining 20% and save it. You can save it for retirement or an emergency fund. This time, when you calculate your essentials, be sure to include expenses like car maintenance, gasoline, doctors’ appointments, and more. You want to include anything that you need to pay for throughout the year. It can be difficult to make this budget work at first, but if you slowly work on adjusting your expenses, you will be there eventually. You might need to reconsider what your rent is, or where you are living. You might also need to reevaluate where your buying your groceries from, or what items you are buying. You could try to cut back on meat expenses by buying other protein-rich food instead, like peanut butter or beans. Learn how to decrease your grocery expenses.

The 50/30/20 Budget. This budget is very similar to the last one on the list. The steps are the same, but the ratios are different. This budget is third on our list, because it can be more difficult than the other two we have talked about so far. Once you have mastered the 60/20/20 budget, then you can keep progressing to this one. The idea is to keep saving on those monthly expenses until your needs are only 50% of your income. Learn how to lower your living expenses through minimalism. With this budget, your expenses are split with 50% for essentials, 30% for wants, and 20% savings. Some super savers will even switch the last two numbers so that only 20% is for wants, and 30% is saved. Ultimately, that is up to you. 

 

Easy Tips and Tricks for Planning a Budget? 

A lot of people have advice on how to start budgeting and how to stick to your plan. Here are some of the best personal budgeting tips. 

Get a budgeting app. There are so many out there that can be so helpful! Not sure which to choose? Check our YouTube page for an upcoming video on budgeting apps. Clinton will be reviewing several budgeting apps and letting you know which one is best!

We know that debt cycles happen, and we want to do everything Play games to save money. When you make saving money fun, you might not even notice that you are saving money. Challenge yourself to see how much you can save at the grocery store, or how many quarters you can collect in a week. Sometimes competitive fun is all you need.

If there is a want or luxury item you want, wait at least 24 hours before purchasing it. Waiting will help you determine if you actually want something or if it is just a spontaneous purchase you will later regret. Craving Chinese food at 11 PM might be caused by a wondering thought. Craving BBQ for several days straight might be a sign that you really want BBQ.

For more budgeting tips, check our blog. We share a new article each week. We also have several budgeting tips on our YouTube channel. Have you found success in budgeting? Comment below and share your budgeting experience or any advice. 

 
Monday, June 8, 2020
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