Money management is a crucial life skill that everyone should learn. However, budgeting and tracking your spending can feel overwhelming, especially if you’ve never done it before. The good news is that budgeting gets easier with time and practice. Developing smart money habits now will serve you well throughout your life.
This comprehensive beginner’s guide covers everything you need to know to start budgeting, from financial goal setting to choosing a budgeting system. You’ll also learn budget-friendly tips for saving money in areas like housing, transportation, food, and more. Follow this advice to take control of your finances, reduce stress, and set yourself up for a bright financial future.
Why Budgeting is Important
Budgeting simply means balancing your income with your expenses. It’s an essential process to gain control over your hard-earned money. Here are some key reasons why budgeting matters:
Achieve Financial Goals
The first step in financial planning is defining your goals. This could include anything from buying a house, paying off debt, taking a dream vacation, or retiring early. A budget aligns your spending with those objectives so you can actually make them happen.
Reduce Overspending
It’s easy to accidentally overspend without realizing it, especially on variable expenses like dining out, entertainment, and shopping. Tracking your spending highlights areas where you may be overspending so you can cut back.
Gain Security
Budgets build wiggle room into your finances, which reduces stress and provides a safety net for surprise expenses. You’ll be prepared when unplanned bills pop up like car repairs, medical bills, or emergency travel.
Improve Credit
Responsible money management, including paying bills on time and reducing debt, will boost your credit score. Good credit saves you money on interest rates for loans and credit cards.
Budgeting Tips for Beginners
If you’ve never tried budgeting before, it can help to start with simple, practical steps. Here are some pointers for beginners:
- Start with fixed expenses first. Fixed expenses include things like rent/mortgage, car payments, insurance, utilities, etc. They’re predictable each month, so they’re easy numbers to plug into your budget.
- Use a budgeting app or spreadsheet. Make things easy by using an app like Mint or creating your own budget worksheet. Apps automate categorizing expenses and provide helpful graphs.
- Save first, spend second. Before budgeting any variable expenses, pay yourself first by saving a portion of your income. Start small if needed, like 5-10%.
- Include discretionary spending. Budget some money for guilt-free discretionary spending like hobbies, entertainment, dining out, etc. Restricting too much leads to deprivation and binge spending.
- Use cash for discretionary purchases. Pay with cash for expenses like coffee, movies, etc. It provides a visual limit and makes you more mindful about spending.
- Avoid accounting for every penny. Tracking every dollar is unnecessary. Small expenses under $10 can go in one generic “daily spending” category.
- Revisit your budget frequently. Review your budget at least every month to hold yourself accountable and make changes as needed. Incomes and expenses evolve over time.
- Be patient. Don’t expect a perfect budget right away. It takes time to understand your spending patterns and adjust. Stick with the process.
How to Make a Budget Step-By-Step
Here is a step-by-step guide to creating your first budget:
Step 1: Calculate Your Net Monthly Income
Tally up all of your regular monthly income after taxes. Be sure to include:
- Wages from your job(s)
- Interest earned on savings accounts
- Monthly dividends or cash income from investments
- Any other income sources like alimony, VA benefits, etc.
This is your total net monthly income.
Step 2: List Your Fixed Expenses
Make a list of all the fixed bills you pay each month:
- Housing (rent/mortgage, taxes, insurance)
- Debt payments (student loans, personal loans, credit cards, etc.)
- Car payment and insurance
- Utilities like electricity, water, gas, internet, phone, etc.
- Groceries and basic household items
- Insurance premiums (health, life, etc.)
- Childcare, alimony or child support
- Prescriptions and medical expenses
- Gym memberships, subscriptions
- Investments like 401(k) contributions
Add these numbers up to get your total fixed expenses amount.
Step 3: Estimate Variable Expenses
Next, make a list of your variable monthly expenses. These are costs that fluctuate each month like:
- Dining out
- Entertainment, hobbies and leisure
- Gasoline and car maintenance
- Personal care items
- Clothing and shoes
- Travel and vacations
- Gifts and donations
- Miscellaneous shopping
Use past bank and credit card statements to estimate an average for each category.
Step 4: Add Up All Expenses
Total your fixed expenses from Step 2 with your variable expenses from Step 3. This is your overall estimated monthly spending.
Step 5: Compare Income vs. Expenses
Now compare your net monthly income from Step 1 to your overall spending from Step 4.
Ideally, your income should be more than expenses. If it’s not, look for areas to cut spending.
If there is money left over after expenses, decide how to allocate the extra based on your savings goals.
Step 6: Track and Tweak
Once you set your initial budget, track your actual spending to see how it compares. Many expenses will differ from your estimates.
Review your budget monthly and adjust categories as needed so they align with your true spending habits. The budgets become more accurate over time.
Don’t forget to periodically review your budget as income changes. For example, adjust when you get a new job or pay raise. You may choose to increase your savings rate.
Budgeting Systems and Methods
There are different approaches and formats you can use to set up your budget. Find a system that fits your preferences and needs.
The 50/30/20 Budget
This popular budgeting method allocates income into three spending categories:
- Needs – 50%: Includes fixed expenses like housing, utilities, transportation, debt payments, insurance, etc.
- Wants – 30%: Covers variable expenses for lifestyle and entertainment like dining out, hobbies, shopping, travel.
- Savings – 20%: Savings allocations like retirement accounts, emergency fund contributions, college savings, etc.
For example, if your net income is $5,000 per month, you would budget:
- $2,500 per month for needs
- $1,500 per month for wants
- $1,000 per month for savings
The 50/30/20 approach ensures you balance spending, saving, and lifestyle expenses. You can adjust the percentages as needed.
Zero-Based Budget
With a zero-based budget, every dollar gets a job assigned to it. The goal is to allocate your full income towards spending needs and savings so nothing is left unbudgeted.
It’s a more involved process. You review income and expenses daily or weekly and assign each dollar coming in to a specific category.
Apps make this easier by auto-syncing transactions and categorizing spending for you. Or you can use a spreadsheet to manually enter transactions and create zero-based budgets.
This method provides detailed tracking and full accountability for every penny. It prevents overspending since no dollars go unallocated.
Pay Yourself First Budget
As the name suggests, a “pay yourself first” budget prioritizes savings allocations as you earn income.
For example, you would automate transferring a set percentage of each paycheck towards retirement, emergency savings, and other financial goals right away.
The rest gets budgeted for fixed needs and other expenses after savings. This ensures you save consistently rather than only saving whatever is leftover each month.
The Envelope System
This old-school budget technique uses virtual “envelopes” to represent spending categories. For example:
- Grocery envelope
- Gas envelope
- Dining out envelope
- Entertainment envelope
You withdraw cash to fill each envelope based on the budgeted amount. When the money runs out, that spending category is tapped out until the next month.
Cash provides tangible spending feedback. The envelope method works best for variable expenses you want to restrict like dining, entertainment, shopping, etc.
Monthly vs. Weekly Budgets
Budgets can be arranged by month or by week depending on your pay schedule and preferences.
Many expenses like rent, utilities and subscriptions are monthly. Budgeting by month fully allocates those fixed costs first before variable spending.
Weekly budgets match up better if you get paid every week or biweekly. Allot weekly amounts for groceries, gas, discretionary expenses, etc. This allows for some flexibility week to week.
Use whichever approach fits your lifestyle. You may switch between monthly and weekly budgets occasionally as needed.
Ways to Save Money in Key Budgeting Categories
Budgeting will reveal areas where you can cut spending and reallocate towards financial goals. Here are some smart ways to save in common budget categories:
Housing
Housing is often the largest regular expense. Saving here can really impact your bottom line.
- Get a roommate to split costs
- Negotiate discounts on rent for paying early or on time
- Look for cheaper apartments with fewer amenities
- Consider downsizing to a smaller living space
- Rent out extra rooms to earn income
- Buy used furniture from thrift stores
- Turn down the heat and wear extra layers indoors during winter
- Unplug devices when not in use to save electricity
- Take shorter showers to conserve hot water
Transportation
After housing, transportation is the next biggest expense for many people.
- Buy used vehicles and drive them for longer
- Use public transportation or carpool when possible
- Combine errands into one trip to limit driving
- Make sure your tires are properly inflated for better gas mileage
- Follow the recommended maintenance schedule to avoid costly repairs
- Drop collision insurance once the car value drops below $3,000
- Shop for cheaper car insurance rates every few years
Food
Groceries, dining out, coffee shops and more can drain a lot of money over time.
- Plan meals ahead of time and shop with a list
- Buy store brands instead of name brands
- Shop sales and use coupons
- Buy staple foods like rice, potatoes, beans and eggs in bulk
- Freeze excess foods or leftovers to prevent waste
- Pack your lunch and make coffee at home
- Host potlucks instead of going out to eat
- Avoid convenience and prepared foods
- Eat before shopping if hungry to limit impulse buys
- Shop at farmer’s markets for lower produce costs
- Plant an herb or vegetable garden for fresh ingredients
Shopping and Personal Items
It’s easy to overspend at the mall, Amazon, and even grocery store aisles if you aren’t careful. Here are some ideas to curb spending:
- Create a list before going shopping and stick to it
- Avoid window shopping without an intent to buy
- Give yourself a waiting period before buying discretionary items
- Unsubscribe from promotional emails to reduce temptation
- Start a “no-buy” month to see what you can live without
- Use a small portion of cash for discretionary spending
- Buy quality items that last vs. constantly replacing cheap items
- Borrow books from the library instead of buying
- Rent or stream movies instead of going to the theater
- Batch errands into one trip to save gas
- Cut your own hair and give yourself manicures
- Trade skills like tutoring to get services you need
Budgeting Apps and Tools
Budgeting apps provide convenient expense tracking and reporting features that simplify the entire process. Here are some top options:
Mint
Mint is one of the most popular and full-featured budgeting apps available. It securely connects to your financial accounts to pull all transaction data and sort spending into categories.
The interface allows you to view graphs summarizing spending by category. You can also manually enter cash expenses and create customized budgets. One advantage is that Mint is free to use. The brand is trusted by millions of users.
You Need a Budget (YNAB)
YNAB prioritizes the “zero-based budget” method. The app encourages you to assign every dollar a purpose rather than just tracking where money already went. Their system focuses on intentionality and planning ahead.
While Mint is retrospective, YNAB is forward-thinking. It provides interactive workshops and resources to guide beginners through the zero-based methodology. The app costs $14.99 per month after an initial 34-day free trial.
EveryDollar
EveryDollar was created by personal finance expert Dave Ramsey. The app allows you to create zero-based budgets either manually or by syncing bank account transactions.
A key feature is the ability to set monthly or weekly budgets with differing time frames. EveryDollar costs $8.99 per month for premium after a 14-day free trial. The free version provides basic budgeting features.
Goodbudget
Goodbudget makes budgeting transparent for the whole family. It uses the “envelope system” to allocate funds into color-coded spending categories. You can easily move money between envelopes as needed.
The app provides individual logins for partners with the option to keep envelopes private or shared. Goodbudget is free for the basic version with options to upgrade starting at $6 per month.
Wallet
Wallet is a fully offline budgeting app. Rather than linking accounts, you manually input all transactions. This provides total privacy if you prefer not to connect financial accounts.
The interface is simple with spending organized into bubbles. Double tapping bubbles allows adjusting amounts or adding new transactions. Wallet costs a one-time fee of $6.99 to download.
Budgeting Tips And Mistakes To Avoid
Here are some additional pointers for budgeting success as well as common mistakes to avoid as a beginner:
Tips
- Automate saving right when you get paid before spending anything
- Start tracking expenses today before next month’s budget
- Use a calendar to plan fixed bill due dates and avoid late fees
- Schedule monthly budget reviews to hold yourself accountable
- Involve any financial partners in the budgeting process
- Make budgeting a part of your daily routine like checking email
- Focus on small behavior changes, not a wholesale lifestyle overhaul
Mistakes to Avoid
- Don’t beat yourself up over slip-ups and overspending
- Avoid restrictive budgets that rely on willpower to resist temptation
- Don’t neglect financial goals like saving for emergencies or retirement
- Don’t make impulse purchases assuming they fit into some budget category
- Don’t ignore unexpected income like tax refunds or bonuses in your plan
- Don’t rely solely on manual entry rather than connecting accounts
- Don’t obsessively micromanage every single dollar
Conclusion
Learning how to budget is a foundational skill you can master with time and practice. Following a budget will help gain control over your spending, build savings, and make progress towards financial goals. It takes diligence and patience to form new money habits.
The good news is that budgeting gets easier. With the right system and tools, you can budget on auto-pilot. Pay attention to spending patterns and bumps in the road, but don’t stress over normal hiccups. Consistency with budgeting and long-term focus on incremental progress wins out.
Take it one step at a time. The strategies in this guide provide the blueprint to transform how you manage money. Build momentum with small changes today to become a confident budgeter. You’ve got this!
