Budgeting for Beginners: 5 Easy Steps to start today.
Budgeting for beginners might be a bit confusing. You know you need a budget. You’ve done some research and have seen that budgeting is key to long term financial success. But if you’ve never budgeted before, you may be asking yourself where to start.
Me too! I’ve been there.
Before I got started with a budget I was all over the place. Was I spending too much? Was I saving too little? Is it really possible to keep track of every dollar I earn and spend? And why the heck do I feel broke all the time?
What I knew for sure was that I had no idea where my money was going every month, but it definitely wasn’t my savings and I still had debt that was going nowhere fast.
I needed to change my sloppy money ways.
I started looking at every transaction and quickly realized I had to be more intentional with my money and take control to make my financial goals happen.
Starting a budget can seem overwhelming. There’s a lot to think about! But I like to keep things simple and that’s why I created these easy step-by-step instructions to start budgeting for beginners.
First, let’s get some basics out of the way. It helps to understand what a budget is and why you need one.
What is a budget?
The word “budget” often has a negative connotation for people because it can be associated with restriction and nobody likes that.
In order to stick to a budget, you have to change your mindset about what a budget actually is.
A budget is simply a plan for how you will spend your money. That’s all it is…a plan. It doesn’t have to be restrictive at all.
In fact, for a lot of people it’s very freeing to plan for entertainment, shopping, dining out and other fun activities. By planning ahead for those dollars, you can spend them without feeling guilty and without derailing your money goals.
Why you need a budget.
What is all the hype about and why does anyone actually need a budget? This is a great (and very common) question!
The truth is, as an adult, we have to plan for our future. I know, I know. It’s not fun to set money aside now for things we need or want later, but it’s just a reality of life. #adultingishard
If you want to retire as a wealthy person one day, you have to start planning now. But retirement may be a long way off for you. Let’s bring it in a little closer.
If you want to purchase a new car, a house, or go on vacation, you need to be saving money. If you want to stop living paycheck to paycheck and get out of debt, then a plan for your money is essential.
Clumsy Homemaker Pro-Tip: If you have questions or need advice about retirement, I recommend looking into Dave Ramsey’s investment strategy. You can visit his site here.
So, how do you reach your financial goals and save for big purchases? By budgeting!
Plan ahead so that when it’s time to make those big, fun purchases, you are financially ready and don’t get yourself into debt or in over your head with monthly payments.
Budgeting for Beginners
Alright, let’s get down to it and start budgeting for beginners.
Step 1. Establish your goals
Are you saving for long-term or short-term? Are you trying to get out of debt? Do you want to stop living paycheck to paycheck? All of these things are achievable with a budget.
I recommend that you write down your “why.” Yes, physically write it down. When you write down your goals, they become more real, and when they become real, you are exponentially more likely to achieve them.
So, go ahead and get out that notebook and those pretty pens and write down your money dreams. Then post them up where you can see them every day to remind yourself why you’re skipping the Target run today.
Step 2. Analyze Your Income
This is one of the easiest steps to start budgeting for beginners. Look at your average income over the last 3 months and write it down. For most people, this will be a fairly consistent amount.
If you have a variable income, you can use the average earnings over the last 3 months or use the lowest amount from the same time period. By using the lowest amount, you’re essentially creating a cushion if you actually bring in more money.
You know what “normal” is for you, so you decide what number makes the most sense.
Step 3. Categorize Your Spending
This step is where you get your reality check and it can be VERY eye-opening when budgeting for beginners.
Pull up your bank statements for the last 3 months and start dividing your transactions into various categories of spending. Then add up the transactions in each category.
Start with the essentials: rent/mortgage, utilities, phone, transportation.
Then move on to food, clothing, gas. These can be considered “essentials” also, but I like to look at them separately because these can also be areas where we tend to overspend.
Next, you’ll categorize your non-essential transactions such as entertainment and miscellaneous expenses.
Finally, identify any other areas where your money goes each month such as savings and debt payments including student loans, car loans, credit cards, etc. Only write down the minimum payments due each month. We’ll talk more about this later.
Step 4. Plan Your Spending
This is the step where we give every dollar a job and make it work for us. Work, baby, work!
Start by determining how much you’ll spend in each category. Here are some recommended percentages – and an example based on a $3000 per month income – for the amount of income to allocate to different categories:
- Housing: 25% = $750
- Utilities: 5-10% = $150-$300
- Food: 10-15% = $300-$450
- Transportation: 10% = $300
- Insurance: 10-25% = $300-$750
- Recreation: 5-10% = $150-$300
- Personal Spending: 5-10% = $150-$300
- Miscellaneous: 5-10% = $150-$300
Debt will be paid with the remaining money available.
The recommended percentages are not set in stone. Everyone’s situation is a little different.
For instance, my family has regular medical expenses because my daughter has Type 1 Diabetes and my husband has MS. We have to budget for ongoing medical expenses so I include this in my budget whereas a lot of people may not.
Now, go back to Step 3 where you added up what you’ve been spending in each category and compare it to the recommended percentages.
How does it look?
Some of you might be celebrating right now because you have more money than you thought and just need a solid plan for how to spend it intentionally.
Then there are those who are freaking out…like I did…when I realized I was spending WAY too much money each month and needed to dial it back substantially.
If that’s you, don’t worry! Coming to grips with your spending habits is very important when budgeting for beginners. You may not have been aware there’s a problem.
But now that you’re aware, no excuses. Time to get busy and make some changes. You can do it!
Go through each category of spending and decide exactly how much of your anticipated income you’ll spend in each one. This is your plan, your starting point, ground zero for your financial goals to grow from.
Step 5. Implement and Adjust
OK, so here’s some cold hard truth.
Starting to live on a budget is not easy. It takes some adjustment. Especially if you’ve never really paid attention to your money before, aside from checking your bank balance.
You need to set aside some time on a regular basis to track your spending.
I recommend setting a date with yourself once or twice a week to go through your bank transactions and sort them into your categories so you can see how much has been spent and how much is left. This will keep you from overspending.
Even though starting a budget can be a bit difficult in the beginning, here’s some good news. You will get better at it with time.
And it won’t take long. Once you’re consistent with tracking your spending on a regular basis, you’ll get used to the routine and it will only take a few minutes.
Another thing to be aware of is that your budget will change. Remember how I said those recommended percentages are not set in stone? You will likely find as you go along that you need to adjust the amounts in your spending categories.
This is normal and is a GOOD thing! It shows you’re paying attention and that you’re in control. Go you!
A word (or a few) on Savings and Debt
Savings and Debt are things I have strong opinions about. Mostly because I subscribe to the Dave Ramsey school of thought that Saving money should take a backseat to paying off debt.
What?!?! Did she just say that?!
Yes, I sure did.
Why? Because socking money away in savings rather than using that money to pay down debt WILL cost you more in the long run.
Money in a savings account is not working for you. It’s lazy. It’s just sitting there maybe earning 1% in interest, if you’re lucky.
How much interest are you paying on your debt…5%, 10%, 20% or more? Do you see the problem here? That one percent you’re earning on savings is costing you hundreds or even thousands in interest on your debt.
Now, don’t get me wrong. I’m not against saving money. You SHOULD be saving some money and you MUST have an emergency fund for things that happen unexpectedly. But it should not be a ton of money if you have debt to pay off.
Dave Ramsey recommends having $1000 set aside for emergencies. As a family of four with medical needs, I’m more comfortable with an emergency fund of $2500.
You want to get your emergency fund in place as soon as possible.
Have a garage sale, babysit, walk dogs, pick up any extra job on the side until your emergency fund is complete. Once that’s done, savings is no longer your priority.
You still need to plan for holidays, birthdays, graduations, etc., but this should be part of your regular monthly budget. If you want to spend $500 on Christmas, divide that by 12 and save that amount each month. When the holidays roll around, you’ll have money to spend without going into debt.
Speaking of debt. Get rid of it ASAP!
Studies have shown that people who retire wealthy are people who don’t have debt. Why? Because they get to keep their money for themselves rather than giving it to other people.
To pay off debt as soon as possible, start by listing your debts in order of smallest amount owed to largest amount. This is the order in which you will pay off your debt.
Pay as much as you can each month to the smallest debt. When you pay it off, add that monthly payment to the minimum payment for your next smallest debt and start paying that full amount each month.
When that’s paid off, you follow the same process and start paying down the next smallest debt. And so on, and so on until all your debts are paid.
This is called the Debt Snowball. You pay the same amount every month, you just change the debt you’re applying the payment to.
Why do it this way? Because it creates momentum. When you pay off that first debt and can see the debt snowball in action, it’s very powerful emotionally and financially.
What if you have more than you need for your emergency fund?
Congratulations! You are in a great position to start paying off debt FAST. Whatever amount you have saved OVER your emergency fund, put it toward your smallest debt. This will give you a jump start on your debt snowball.
Once all your debt is paid off, you’ll beef up your savings to 3-6 months of household expenses and can start saving for big purchases such as a car, vacation, etc. and you are well on your way to realizing your financial dreams.
So, what’s next?
How to stick to a budget
Accountability and consistency are the keys to sticking to your budget.
An accountability partner is someone who will help you behave with your money even when you don’t want to, and is essential when budgeting for beginners.
When you share finances with someone, you BOTH have to be involved in creating and sticking to a budget. If one of you is better at creating the budget, then that person can be the one to go through the process outlined above, but both people will need to review and agree on the final budget. Get ready for some great, albeit feisty (at times), conversations with your partner.
The budget should be outlined consistently on a monthly basis, but again, I recommend reviewing your spending once or twice a week in the beginning to stay on track and avoid overspending.
If you find that you’re getting off track, or you’ve had some unexpected expenses come up, adjust your budget accordingly.
Now that you’ve seen the process to start budgeting for beginners, you are well on your way to creating and sticking to a plan that will help you take control of your money and your financial future. You can do this! And you will be so glad you did.
If you like what you read and you’re looking to organize your home along with your budget, check out my KonMari Inspired Spring Cleaning Challenge! You’ll have your home tidy and decluttered in no time!