You’re not alone. Most of us are not taught How to Set Up a Budget, but it is never too early to start. In fact, any day is the perfect day to begin. If you are 21 or 51, you can start today and be proud you are making the decision to move your financial life forward in a positive manner.
We’ve all heard about the endless advantages of budgeting: build your savings, get out of debt, eliminate bad spending habits, save $5k for your dream vacation, etc.
But what does budgeting actually mean and how easily can you start (and stick to) a budget? If these questions nag at your mind, then you’ve come to the right place. We’ve created this ultra-practical how-to-start-a-budget guide just for you!
Budgeting, when done properly, should be simple and systemized. We’ll teach you how to create a personalized plan and deepen your understanding of your financial habits so that you can eliminate finance-related stress from your life and start making real progress to achieve your goals.
📝 What is a Budget?
There is not a more effective tool for money management than creating a personalized budget for yourself (and sticking to it!)
A budget is a monthly financial planning tool that allows you to strategically decide how much you can spend and save each month. It is calculated based on your streams of income and monthly expenses. Essentially, your budget paints a clear picture of your money flow so that you can make more conscious money decisions, thus bringing you closer to your financial goals.
📈 Budgeting Benefits
Budgeting will help you:
- Understand your existing spending habits
- Differentiate between needs and wants when it comes to spending
- Help cut back on spending money you don’t actually have
- Create a deeper level of awareness so that you can avoid making money mistakes and work towards your goals.
It does not imply that you have to give up the things you enjoy, or that you have to micromanage every last penny to ensure you aren’t spending your hard-earned cash on anything that isn’t absolutely necessary.
Creating a budget means better understanding your cash flow, the amount per month that you have to spend on necessities, and the amount you can spend on enjoyment, while allocating a portion of your income to savings.
⬆️ Everyone Benefits When They Plan
Whether you are living paycheck to paycheck or thriving with an abundant cushion of savings, creating a budget will benefit you. It is really about setting financial goals and paving a realistic path to help you stay focused until you achieve them. These are the type of people who will benefit:
- Trying to lessen debt or completely pay off debts.
- For those planning for early retirement. 🌴
- Saving up for a specific expense (ie, buying a car, saving for a vacation, paying for a downpayment for a house, etc…)
- Working towards any particular financial goal (building savings, building a retirement fund, growing an emergency fund)
- Living on a small salary or with limited income.
- Trying to eliminate unnecessary expenses or bad spending habits.
- To anyone who just would like to have a better grip on their financial life.
💸 Planning vs “Just Winging It”
Tracking your money is always a good idea because it helps you see where your hard-earned cash is going and where you want it to go.
If you’re anything like me, I can’t always remember how I spent so much so quickly or where it all went. With a budget and personal accountability, it keeps those decisions front and center. These are some reasons to stay on track with a budget plan:
- Keeps you focused on your financial goals.
- Gives you better control over your money.
- Offers clarity on your money flow and spending habits.
- Keep spendings and savings organized.
- Reduces the risk of “blowing” your hard earned money on unnecessary things that you don’t actually want or need.
- Allows you to plan in advance how to best spend your money.
- Enables you to produce extra money.
- Helps transform bad spending habits into consciously planned spending patterns.
📝 Setting It Up
Now that we’ve hopefully convinced you of all the reasons why creating a budget is one of the best things you can do for you and your family, let’s dive into the nitty-gritty! Follow these steps to create one and to get on the fast track to financial progress. Go ahead and grab a notebook as you go through the following steps to begin creating your personalized plan!
Step One: Get clear on your goals and determine the purpose of your budget.
Before starting any new goal, it’s critical to get clear on how this will benefit you personally. Being clear about your goals from the get-go will help you stay on track in the long-term. You don’t need to choose just one goal either!
Download and Print the Financial Goal Sheets Printable.
With these sheets printed, spend some time with your spouse and even your kids to identify your finance-related goals. Make sure that they are all attainable and realistic! I love getting kids involved with this process as it teaches them valuable lessons and sets them up for success!
Refer back to these goals, especially on the days when you feel like splurging outside of your budget limits! In no time, you’ll be asking yourself “does this purchase align to our goals?”
Here are some examples of goals that you might consider if they apply to you:
- Pay off student loans/get out of debt in x amount of time
- Eliminate money-related disagreements with your spouse
- Create an emergency fund
- Put more money into savings each month.
- Save up for a big expense (a wedding, a car, a vacation, etc…)
- Eliminate money-related stress and anxiety from your life
- Save for retirement
- Get clarity on spending habits and to eliminate any unnecessary expense each month to avoid overspending
Step Two: Calculate your monthly income
It is time to identify how much income you have coming in to your house. If you know that, you know your baseline on how much needs to be allocated to expenses and spent as wisely and as intentionally as possible.
Download and Print the Budget Planner Worksheet
You’ll need to add up all of your income streams, including:
- Your monthly salary/wage income
- Income from any investments
- Unexpected income streams (such as money that comes from selling items such as clothes, furniture, etc)
- Money from child support or alimony
- Income from side gigs or part time jobs
Simply add up all of your income streams to calculate your total monthly income amount. This is an important number to be aware of during your entire budgeting journey.
If your total income is irregular or shifts from month to month, that is totally normal and okay as this is the case with many freelancers and contract workers. If this is the case for you, we recommend that you decide on an average monthly income to base your budget around, and you may need to update it from time to time for any drastic income changes.
However, if you are basing your budget off of an estimated/average salary, be sure to give yourself a big enough cushion to cut back on the risk of overspending during less abundant months. This means set your budget on the lower end of the spectrum of your projected monthly income and not on the higher end.
Step Three: Make a List of All Your Monthly Expenses
To create a realistic budget, you’re going to need to understand your spending habits. This is one of the most important steps of creating your budget, so make sure you don’t leave anything out. Experts recommend tracking every expense for 30 days to get a clear picture of your spending habits.
Use an app that tracks your purchases automatically (such as Mint). This allows you to link to your cards and bank accounts, which means less work for you during the tracking process.
You can also use a free printable to write it down. I suspect it won’t take you a full 30 days to figure out where your money is going, kind of like when we have to write down how much we actually eat.
Download and Print the Expense Tracker Printable
At the end of the initial 30 day tracking period, go back through the list and highlight each individual expense that qualifies as a necessity or a “need.” This highlighted group will include absolutely vital expenses like rent, food, utilities, credit card debt, car loan, phone bill, and any other non-negotiables.
For any of these that are recurring bills (like rent, utilities, car payment, etc) record them in a Printable Bill Worksheet. This will help you keep track of what needs to be paid and lets you check off the month you paid them. This is a handy tool to avoid missing bills.
The remaining non-highlighted items on the list are all “wants.” These items might include things like Starbucks coffee, movie tickets, indulgent Amazon purchases, Netflix subscription, and anything else you bought just for the sake of fun and enjoyment.
Getting ultra clear on “needs” and “wants” is a crucial part of the budgeting journey, as it helps you understand where you can cut back if need be, and which areas you’ll absolutely need to have the dollars for each month.
Step Four: Cut Any Unnecessary Expenses
This step is an extension of the previous step, but it’s really important, so I wanted to dive into it a little deeper. After tracking your expenses for 30 days and getting a clear picture of your spending habits, you separated your needs from your wants on your expenses list. We’re now going to take it one step further.
Are there any “wants” on your list that you could do without? Paying a monthly fee for a mobile app that you never use? Are you paying for a gym membership that you only use once every two months? Do you spend more money than you can afford on frequent social outings? THIS IS A HUGE AREA TO SAVE MONEY RIGHT NOW.
One of the best things about monitoring your spending habits is that it gives you the opportunity to eliminate any unnecessary expenses. Before moving on to the next step of the budgeting process, I encourage you to identify and eliminate at least a couple of unnecessary expenses from your monthly routine, you’ll thank yourself later!
Note: Do not equate cutting back on expenses as not having any fun! Instead, use it as an excuse to align your spending to what your want to do the most. I didn’t even realize that I stopped using Spotify when my work commute changed, but I was still paying for it. It was an easy decision to cancel it.
💵 Use the 50/30/20 Method
I love the 50/30/20 budgeting rule because it is easy and effective for managing your budget. It’s a great way to divide your income to ensure that all of your necessary expenses are covered, that you still have money for enjoyment, and it helps put a portion of your income into savings every month.
In Step 2 you determined how much income you’re pulling in each month and in Step 3 you identified your monthly “needs” and “wants” when it comes to expenses. We’re going to put it all together with the 50/30/20 rule.
Essentially this budgeting rule means that you’ll aim for:
- 50% of your monthly income for needs
- 30% of your monthly income for wants
- 20% of your monthly income goes to savings and debt payment
Now that you have determined a monthly income number to base the 50-30-20 rule on, you’ll have to determine exactly which expenses and how much money will be available for each category per month.
This means aiming for all of your “needs” to be covered with 50% of your income. You’ll want to choose your “wants” wisely because they’ll need to total up to no more than 30% of your monthly income. And the best part about this rule is that each month targets 20% of your monthly income for savings (or to pay off debts!)
- Let’s say your total “take-home” income (minus taxes) comes out to $2,500 per month. Using the 50-30-20 rule, this means you should target up to $1,250 per month on needs. With this budget in mind, it means you probably can’t afford renting a $1,000 per month apartment, unless the sum total of all your other “needs” don’t exceed $250 per month (which is probably unrealistic considering your groceries and utilities also fall under the “needs” category).
- Target 30% of your income on “wants”, which means you have $750 to spend on things you don’t necessarily need for survival, but that make life a lot more enjoyable and fun. This includes dining out at restaurants, the occasional Starbucks coffee, buying that new pair of boots you’ve had your eyes on, and the like. “Wants” don’t necessarily mean extravagant extras, it can just mean basic niceties that add a little joy to your day-to-day.
- This budgeting plan sets aside 20% of your income entirely to savings and debt repayments. According to the sample income we used for this demonstration, this means you would target $500 to put into savings or for debt payments.
With this budgeting plan in mind, you’ll be able to ensure that your income meets all your needs and wants, while always having a set amount that gets put into savings each month and you can track that on the Savings Tracker.
💻 Use a Spreadsheet or a Budgeting App
Some people like to track their monthly budget using a spreadsheet to keep track of income and expenses each month. The spreadsheet approach is effective, but it does require a lot more work than using a mobile budgeting app which does the majority of the work for you.
There are a variety of budgeting apps available, some cost nothing and some charge a monthly fee for their services. Take a bit of time to browse some of the most popular budgeting apps to see which one is the best fit for you. The benefit of using these apps is that they connect with your bank accounts and credit cards and automatically update to track ongoing expenses. All of the apps offer different features and budgeting tools. They typically all allow you to set monthly budget amounts for different spending categories and will notify you when you’ve nearly spent your set limit for any given category.
These are some of the best budgeting apps:
- Mint: This free app is probably the most well-known and popular one available. It connects to your bank and card accounts and monitors your spending. It even allows you to monitor your credit score. Set notifications to alert you when you’re getting close to spending past your limit. THIS IS THE ONE WE USE RIGHT NOW.
- You Need A Budget (YNAB): This app is for the serious budgeters who like to be highly involved. It offers a slew of high-tech features and customizable elements to make the user’s budgeting experience as effective as possible. It’s not free but it does include a 34-day free trial.
- Everydollar: This app allows you to create a personal budgeting plan and to track spending. It depicts what you’ve spent in any given category each month and notifies you before you spend over your set limits.
For more information on finding the right budgeting app for you, take a look at our article that compares 7 of The Most Popular Budgeting Apps!
📅 Schedule a Monthly Review
Check in with your family at the end of each month to review and to see if there were any areas where you overspent or if you had any money left over. Make any adjustments as needed. It’s normal to make tweaks to your budget as income and expenses will change over time.
Avoid doing these things while budgeting
- Guessing at monthly costs and not budgeting a realistic enough amount for different spending categories
- Not monitoring your spending to ensure you’re staying within your set limits (this should be done as frequently as possible, bi-weekly is not frequent enough)
- Forgetting to budget for certain items
- Not budgeting in advance for one-off expenses (holiday expenses, large gift expenses, etc., should be considered and budgeted for months in advance)
- Emergencies happen. Create an emergency fund (make this a set portion of your savings account)
- Punish yourself. Plan for fun/entertainment/nights out/date nights (these fall into the wants category but require some planning ahead to ensure they are budgeted for properly)
- Not budgeting for “wiggle room” in each category
- Fail to categorize the difference between wants and needs
- Setting a budget and not sticking to it
Happy budgeting everyone! Please drop a note in the comments and let me know if this helped you!