Creating a budget might sound intimidating if you’ve never done it before. But regardless of income or financial situation, everyone benefits from seeing where their money is going and planning for the future.
There are many benefits to making a budget, such as helping control your spending, reduce stress in your life, and achieve your financial goals. Rather than a hassle or burden, budgeting is a path to financial freedom and stability that puts you in control of your money.
From the financial experts at Western Shamrock, here’s a guide to budgeting for beginners, with step-by-step instructions for how to begin budgeting and stick to a budget each month.
Step 1: Understand Your Income
The first step in how to budget is understanding how much money is coming in and how much you make regularly.
What Counts as Income?
One important concept to understand is gross income vs. net income. Gross income is your total pay before taxes, 401(k) deductions, health insurance, and fees are taken out. Net income is your take-home income that you actually get to keep for yourself.
As you learn how to make a budget, track income from all sources, including your job salary, side gigs, and passive income that you may earn through opportunities like rental properties, a YouTube channel, or stock photo sales.
If your income varies each month, you can estimate incoming money based on past months’ earnings or make conservative estimates for budgeting purposes.
Tools to Track Income
Fortunately, there are many budgeting for beginners tools to help you track your income.
You can start by reviewing your bank statements and making manual spreadsheets of money coming in. Alternatively, you can use mobile apps for income tracking, such as PocketGuard, Hurdlr, and Clarity Money.
Step 2: List Your Expenses
The next step in how to create a budget involves assessing what you spend money on to prioritize essential costs and save for important things.
Categorizing Expenses
You can start your expense evaluation by categorizing your expenses into fixed and variable costs. Fixed expenses are your mortgage or rent and utilities. Variable expenses include groceries, transportation, and entertainment.
This step of how to set up a budget should also detail other expense categories, such as debt repayment, savings, and charitable giving.
The 50/30/20 Rule
One popular approach for how to start a budget uses the 50/30/20 rule. The breakdown is 50% for your needs, 30% for your wants, and 20% for savings and debt.
Examples of “needs” are housing and utilities, while “wants” are things like dining out and going to movies. For your remaining 20%, consider savings strategies like a retirement account and emergency fund.
Handling Fluctuating Expenses
Many people’s expenses aren’t the same every month, and that’s totally fine.
Fluctuating expenses are often opportunities to cut back on your spending by splurging less on food, travel, and entertainment. Consider taking an average of your fluctuating monthly expenses over the past six months while figuring out how to budget.
Step 3: Choose a Budgeting Method
There is no one-size-fits-all approach to how to begin budgeting. Fortunately, there are a few different budgeting methods that you can try to see if they work for you.
Types of Budgeting Methods
We’ve already discussed the 50/30/20 budgeting approach, which allocates percentages of income for needs, wants, savings, and debt. Another strategy is zero-based budgeting, which involves assigning a purpose to every dollar to ensure that income minus expenses equals zero.
You can also try the envelope system, in which you allocate cash for each spending category and stick to it. Budgeting apps and spreadsheets, including EveryDollar, Mint, and Google Sheets, are valuable tools for how to budget with accurate tracking.
How to Choose the Right Method for You
Different budgeting approaches work better for people based on individual financial goals and preferences.
Some people seek the most straightforward approach possible, while others want greater detail in their financial planning. Figuring out how to make a budget may take a bit of trial and error, so be patient with yourself and know that the end result is worth it.
Step 4: Subtract Expenses from Income
The fourth step in how to budget money for beginners is to do some math and subtract your expenses from your income to see what’s left.
Creating a Zero-Based Budget
A zero-based budget works well for people skilled at recordkeeping and with a set monthly income. It doesn’t mean you’re left broke at the end of each month. It just means that every dollar has a purpose. You can leave a buffer of a couple of hundred dollars for peace of mind.
If your income exceeds your expenses, you can redirect a surplus to savings or to pay off debt. But if your expenses exceed your income, you’ll need to identify categories to cut back on, perhaps dining out less or canceling subscriptions.
Tips for Managing Deficits
Don’t stress if you encounter deficits while setting up a budget. You may only need to reduce your discretionary spending for a limited amount of time or temporarily defer your savings goals. It may also help to pick up a side gig to bring in extra income on a short-term basis.
Step 5: Track Your Spending
Tracking your spending is a tedious but entirely necessary part of budgeting for beginners. Here’s how to do it.
Why Tracking Is Essential
Tracking helps hold you accountable to your financial goals and prevents overspending. You can set daily or weekly reminders to log your expenses to establish regular tracking habits. Once you get into a good pattern, it will become second nature.
Tools for Tracking
You can track your expenses using spreadsheets, apps, or even a simple notebook. Whatever works best for you is ideal for logging all your expenses, from drive-through coffee to rent and everything in between.
Adjustments and Flexibility
However, don’t be afraid to adjust your budget whenever necessary – even in the middle of the month. Keeping flexibility in your budget is essential for being prepared for unexpected expenses, such as sudden emergencies or overestimated bills.
Step 6: Adjust and Revise Regularly
A budget should never be set in stone. Think of your budget as a “living document” that grows and changes as you do.
Reviewing and Revising Your Budget
As you settle into a plan for how to budget, ensure that you revisit and revise your budget monthly or quarterly. This way, you’ll continually assess your financial progress and be in a good position to adjust categories as your circumstances, income, and goals change.
Common Budgeting Challenges and How to Overcome Them
Many budget missteps occur when people don’t plan for lifestyle inflation and emotional spending. Poor prioritizing can also lead to missed savings opportunities.
One of the best things you can do while creating a budget is to set up an emergency fund and save consistently, even in modest amounts.
Step 7: Make a New Budget for the Next Month
Remember, the first day of each month is a new opportunity to take control of your spending and savings.
Start Fresh Each Month
When you create a new budget before the start of each month, you’ll be more prepared for whatever the days ahead will bring. This strategy can help you plan for holidays, birthdays, and seasonal costs as the year goes by.
Anticipating Irregular Expenses
It’s also important to be mindful of one-time and periodic expenses that may arise in your life.
For example, you may be involved in an accident and face sudden medical costs, or your car may break down, and you need to make repairs or buy a new vehicle. You can be prepared for irregular expenses with an emergency fund or safety net savings so the rest of your budget won’t be entirely thrown off.
Bonus Tips for Budget Success
Here are some additional tips for making a budget and incorporating budgeting into your life:
- Set financial goals, such as building an emergency fund, paying off debt, or making a major purchase
- Create a “fun money” category to allow spending for fun and leisure without guilt
- Track non-monthly expenses in a separate category for things like subscriptions, taxes, and insurance to avoid surprises
How Western Shamrock Can Help
Western Shamrock is a trusted financial company that can help you take control of your finances and stick to your budget.
We offer personal loans that you can use for urgent needs whenever life throws you off your budget. When you need to make a large household purchase but funds are low, we can assist you with a personal line of credit to make payments over time. When tax season rolls around, our tax preparation services can help you maximize your refund so you can put that towards savings or paying off debt.
Please visit a branch near you to discuss your budget with our local staff and how we can help.
