Budgeting 101
Budgeting 101
How to Start Budgeting for the First Time
Did you know that budgeters are twice as likely to report no financial worries. After all isn't that all we aspire to do. There are many of us who live paycheck to paycheck and are just a paycheck short of having huge financial difficulty. Spenders don't recognize the importance of budgeting and therefore often get themselves in very compromising financial situations that often times can be avoided.
If you've read any personal finance advice, you know there's one simple rule that comes up time and again: YOU NEED A BUDGET. A budget is a road map for where your money will go so you can make your hard-earned income work for you. Budgets assign your money a job and establish spending limits for specific expenditures so you can use your money responsibly.
Creating a personalized budget is essential to saving money for long term , setting right spending habits. and ensuring the money in your bank account goes where it needs to. But how do you make a budget?
Getting started with your first budget may seem complicated, but this Budgeting 101 article will walk you through every step in the process. You'll learn how to budget, how to avoid common budgeting mistakes, and how to ensure your budget is one you can actually stick to.
1. Determine why you want a budget
While budgeting is always a great decision, it's good to define goals before you start the process, since the reasons you're budgeting may impact choices you make during the process. Common reasons to create a budget include:
-Finding a way to save more money
-Reducing overspending on problem areas
-Ending fights about money for couples
-Making sure your spending reflects your goals and values
-Breaking the paycheck-to-paycheck cycle
-Avoiding spending money you don't have
-Getting out of debt
-Staying on track toward long-term financial goals
While it may seem silly to think about your motivations, psychology plays a big role in how we handle money. In fact, University of Maryland research into budgeting showed the process of creating a budget makes it more likely goals will be achieved because the process of hashing out the numbers creates an emotional investment, enhances motivation, and discourages cheating.
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2. Identify your personalized financial goals
Most people who make a budget do so because they want to accomplish more with their money. This usually involves achieving long-range financial goals such as:
-Saving for Retirement
-Building an emergency fund
-Buying a house
-Purchasing a new vehicle in cash
-Paying off debt
-Saving for college
-Saving for a vacation or other big purchases
3. Do a deep dive into current spending habits
Before you can create a realistic budget, you need to know what your current spending habits are. If your budget isn't realistic, it's nothing more than a wishlist.
You won't know if your budget is realistic until you've got an idea of where your money is currently going. Most experts recommend tracking your spending for about 30 days to get a clear picture of spending. There are a few ways to track spending:
-Enter your expenses into a spreadsheet or notebook: Whenever you make a purchase, write it down or enter it into a spreadsheet. This is the most hands-on approach but can be time-consuming and you might forget expenditures if not entered immediately. It helps to keep your receipts.
-Use an app: Apps such as Mint, Dollarbird, and Pocketguard make it easy to track spending by linking your credit cards and bank accounts. Link all accounts and ensure each purchase is labeled correctly to get an accurate assessment.
-Use your statements: Credit card and bank statements can help track spending, although this approach is less likely to produce detailed results because you may not remember what a particular transaction was for. Still, if you want to get started with your budget right away, going back over a month or two of old statements will give you a big picture to use as a jumping-off point.
4. Use a calendar to catch irregular expenses
While tracking spending shows you where money goes on a day-to-day basis, your budget should also factor in funds for irregular expenses, such as holidays and birthdays.
5. Add up all of your income
Budgeting is about making the best use of income, so you need to know how much money you have coming in. Factor in income from all sources including:
Wage income
Money from side gigs
Alimony and/or child support
Business income
Income from investments
If your income is variable, one of the best budgeting approaches is to pay yourself a salary. This means you'll decide on a monthly "salary" to base your budget around and when extra money comes in, save it in case of a bad month later. The monthly income you choose as your salary could be based off what you earn on average, or what you'd typically earn in a bad month if you want to build a bigger cushion and reduce the risk of overspending.
Those with irregular incomes could also live off last month's income, updating their budget each month based on what they earned the month prior -- but this is a more labor-intensive approach.
6 . Determine how you'll hold yourself accountable
Making a budget is only the first step. You have to figure out how to live by your budget. Some people are disciplined enough to just do it, but there are also techniques that can help you stay with your plan. Some of the best approaches include:
-: Put your bills on autopay -- including extra payments to debt -- and automate transfers to retirement and savings accounts. When money moves where it needs to go before you get a chance to see it, you're less likely to spend it.
-The envelope system: The envelope system involves physically putting cash in an envelope for each spending category and labeling it. Spend only money from the proper envelope on all purchases in each category. When the money is gone, you're done spending for the month.
-Tracking spending: You'll need to continue to keep track of spending to see if you're sticking within your limits. Apps help. When you link accounts with budgeting software, you can see right away where money is going and the app should generate reports showing whether you stuck to your budget.
If you have a partner, you can hold each other accountable by working together to make sure you're sticking to the spending limits you've set.
When you set goals, you can align your budget around achieving them by deciding how much you need to set aside to accomplish each goal. Goal setting has been shown repeatedly by studies to increase motivation and achievement. To be effective, your goals should:
Be specific: Instead of "save for a house," your goal should be "save $100,000 for a down payment."
Include deadlines: When do you want to buy that house or purchase a new car or retire or send your kids to college? Set a target date by which you'll need to achieve your goal.
Setting goals is the single most crucial part of making a budget. If you don't use your budget to make sure you're working toward goals, all you're doing is shifting spending and you'll still have nothing to show for your money in the end.
7. Avoid these common budgeting mistakes
Budgeting is an imperfect process, so don't be discouraged if you don't get everything right the first time. To maximize your chances of success, it's helpful to learn from the experience of others. If you make a budget you can't possibly stick to, you'll set yourself up for frustration.
-Budgeting based on gross income: Take-home pay minus taxes and deductions for health insurance premiums, is lower than your annual salary. When you set up your budget, you're finding jobs for dollars you actually bring home each month. Look at bank deposits to see how much your actual inflow is and budget based off that amount.
-Failing to consider big changes: Often, people who find that income isn't high enough to meet expenses start looking for discretionary expenses to cut. You may cancel cable TV and give up eating out. While little cuts can be helpful, sometimes it's big, fixed expenses that cause problems. Selling your car with the $400 a month payment, getting a roommate to cut the rent in half, or moving to a cheaper house will do way more to free up money than cutting a few coupons or downscaling your cellphone plan.
8. Set up a monthly budget review
Finally, it's important to check in with your budget and make adjustments as needed. See how you did each month, where you overspent, and if you had extra left over. Then, adjust your budget according to what you've learned.
Your life will change over time so changes will always need to be made. Once you've got a good baseline budget, however, making tweaks is easy.
Now you know how to budget to save money and cut spending .
Whew! You've gone through all the essential steps of the budgeting process now. If you're feeling overwhelmed, don't be. Budgeting is really easy once you've gotten the hang of it -- and now you know every step you need to take to budget so you can make your hard-earned money work for you. Start budgeting today and you'll see how much happier you are when you live on a budget, save money for your future, and spend guilt-free.
Did you know that budgeters are twice as likely to report no financial worries. After all isn't that all we aspire to do. There are many of us who live paycheck to paycheck and are just a paycheck short of having huge financial difficulty. Spenders don't recognize the importance of budgeting and therefore often get themselves in very compromising financial situations that often times can be avoided.
If you've read any personal finance advice, you know there's one simple rule that comes up time and again: YOU NEED A BUDGET. A budget is a road map for where your money will go so you can make your hard-earned income work for you. Budgets assign your money a job and establish spending limits for specific expenditures so you can use your money responsibly.
Creating a personalized budget is essential to saving money for long term , setting right spending habits. and ensuring the money in your bank account goes where it needs to. But how do you make a budget?
Getting started with your first budget may seem complicated, but this Budgeting 101 article will walk you through every step in the process. You'll learn how to budget, how to avoid common budgeting mistakes, and how to ensure your budget is one you can actually stick to.
1. Determine why you want a budget
While budgeting is always a great decision, it's good to define goals before you start the process, since the reasons you're budgeting may impact choices you make during the process. Common reasons to create a budget include:
-Finding a way to save more money
-Reducing overspending on problem areas
-Ending fights about money for couples
-Making sure your spending reflects your goals and values
-Breaking the paycheck-to-paycheck cycle
-Avoiding spending money you don't have
-Getting out of debt
-Staying on track toward long-term financial goals
While it may seem silly to think about your motivations, psychology plays a big role in how we handle money. In fact, University of Maryland research into budgeting showed the process of creating a budget makes it more likely goals will be achieved because the process of hashing out the numbers creates an emotional investment, enhances motivation, and discourages cheating.
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2. Identify your personalized financial goals
Most people who make a budget do so because they want to accomplish more with their money. This usually involves achieving long-range financial goals such as:
-Saving for Retirement
-Building an emergency fund
-Buying a house
-Purchasing a new vehicle in cash
-Paying off debt
-Saving for college
-Saving for a vacation or other big purchases
3. Do a deep dive into current spending habits
Before you can create a realistic budget, you need to know what your current spending habits are. If your budget isn't realistic, it's nothing more than a wishlist.
You won't know if your budget is realistic until you've got an idea of where your money is currently going. Most experts recommend tracking your spending for about 30 days to get a clear picture of spending. There are a few ways to track spending:
-Enter your expenses into a spreadsheet or notebook: Whenever you make a purchase, write it down or enter it into a spreadsheet. This is the most hands-on approach but can be time-consuming and you might forget expenditures if not entered immediately. It helps to keep your receipts.
-Use an app: Apps such as Mint, Dollarbird, and Pocketguard make it easy to track spending by linking your credit cards and bank accounts. Link all accounts and ensure each purchase is labeled correctly to get an accurate assessment.
-Use your statements: Credit card and bank statements can help track spending, although this approach is less likely to produce detailed results because you may not remember what a particular transaction was for. Still, if you want to get started with your budget right away, going back over a month or two of old statements will give you a big picture to use as a jumping-off point.
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4. Use a calendar to catch irregular expenses
While tracking spending shows you where money goes on a day-to-day basis, your budget should also factor in funds for irregular expenses, such as holidays and birthdays.
Half of those who borrowed to cover holiday costs would still be repaying holiday debt at least three months later. By budgeting throughout the year, you'll never get into holiday debt again. Some irregular expenses in your budget might include:
Christmas, Hanukkah, or other gift-giving holidays
Birthdays
Annual car inspections and registrations
Annual vacations
Property taxes
Professional dues
Annual insurance premiums
Annual medical exams, including veterinary exams
Your calendar and past credit card statements will help you make a list of all expenses that crop up throughout the year.
Christmas, Hanukkah, or other gift-giving holidays
Birthdays
Annual car inspections and registrations
Annual vacations
Property taxes
Professional dues
Annual insurance premiums
Annual medical exams, including veterinary exams
Your calendar and past credit card statements will help you make a list of all expenses that crop up throughout the year.
5. Add up all of your income
Budgeting is about making the best use of income, so you need to know how much money you have coming in. Factor in income from all sources including:
Wage income
Money from side gigs
Alimony and/or child support
Business income
Income from investments
If your income is variable, one of the best budgeting approaches is to pay yourself a salary. This means you'll decide on a monthly "salary" to base your budget around and when extra money comes in, save it in case of a bad month later. The monthly income you choose as your salary could be based off what you earn on average, or what you'd typically earn in a bad month if you want to build a bigger cushion and reduce the risk of overspending.
Those with irregular incomes could also live off last month's income, updating their budget each month based on what they earned the month prior -- but this is a more labor-intensive approach.
6 . Determine how you'll hold yourself accountable
Making a budget is only the first step. You have to figure out how to live by your budget. Some people are disciplined enough to just do it, but there are also techniques that can help you stay with your plan. Some of the best approaches include:
-: Put your bills on autopay -- including extra payments to debt -- and automate transfers to retirement and savings accounts. When money moves where it needs to go before you get a chance to see it, you're less likely to spend it.
-The envelope system: The envelope system involves physically putting cash in an envelope for each spending category and labeling it. Spend only money from the proper envelope on all purchases in each category. When the money is gone, you're done spending for the month.
-Tracking spending: You'll need to continue to keep track of spending to see if you're sticking within your limits. Apps help. When you link accounts with budgeting software, you can see right away where money is going and the app should generate reports showing whether you stuck to your budget.
If you have a partner, you can hold each other accountable by working together to make sure you're sticking to the spending limits you've set.
When you set goals, you can align your budget around achieving them by deciding how much you need to set aside to accomplish each goal. Goal setting has been shown repeatedly by studies to increase motivation and achievement. To be effective, your goals should:
Be specific: Instead of "save for a house," your goal should be "save $100,000 for a down payment."
Include deadlines: When do you want to buy that house or purchase a new car or retire or send your kids to college? Set a target date by which you'll need to achieve your goal.
Setting goals is the single most crucial part of making a budget. If you don't use your budget to make sure you're working toward goals, all you're doing is shifting spending and you'll still have nothing to show for your money in the end.
7. Avoid these common budgeting mistakes
Budgeting is an imperfect process, so don't be discouraged if you don't get everything right the first time. To maximize your chances of success, it's helpful to learn from the experience of others. If you make a budget you can't possibly stick to, you'll set yourself up for frustration.
-Budgeting based on gross income: Take-home pay minus taxes and deductions for health insurance premiums, is lower than your annual salary. When you set up your budget, you're finding jobs for dollars you actually bring home each month. Look at bank deposits to see how much your actual inflow is and budget based off that amount.
-Failing to consider big changes: Often, people who find that income isn't high enough to meet expenses start looking for discretionary expenses to cut. You may cancel cable TV and give up eating out. While little cuts can be helpful, sometimes it's big, fixed expenses that cause problems. Selling your car with the $400 a month payment, getting a roommate to cut the rent in half, or moving to a cheaper house will do way more to free up money than cutting a few coupons or downscaling your cellphone plan.
8. Set up a monthly budget review
Finally, it's important to check in with your budget and make adjustments as needed. See how you did each month, where you overspent, and if you had extra left over. Then, adjust your budget according to what you've learned.
Your life will change over time so changes will always need to be made. Once you've got a good baseline budget, however, making tweaks is easy.
Now you know how to budget to save money and cut spending .
Whew! You've gone through all the essential steps of the budgeting process now. If you're feeling overwhelmed, don't be. Budgeting is really easy once you've gotten the hang of it -- and now you know every step you need to take to budget so you can make your hard-earned money work for you. Start budgeting today and you'll see how much happier you are when you live on a budget, save money for your future, and spend guilt-free.
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