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No matter what source you seek to learn personal finance advice, there is once thing that they all have in common: you need a budget.
A budget is a spending plan for your money. It helps you ensure that the amount of money spent on necessities and wants doesn’t exceed the dollar amount that you’re paid. Simply put, a budget helps you spend your hard-earned money responsibly.
If you’re currently living paycheck to paycheck, trying to pay off debt, or want to add more money to your savings account for retirement, creating a budget can help.
But how do you make your first budget?
How to create a budget for beginners
Getting started with creating your first budget may seem overwhelming or intimidating, but I’m here to help. Grab your pen and paper. We’re jumping right in to help you design a budget that helps you meet your financial goals.
Making the choice and decision to manage your money better is actually the first step to getting on the right track. You’ve had some sort of ‘ah-ha moment’ that helped you realize that how you’re currently living is less than desirable.
Gaining control of your spending so that you’re living within your means is the first step in reaching your financial goals.The Ultimate Budget Toolkit
Determine your income
Budgeting is about making the most use of your income, so it’s important that you know exactly how much you make. Be sure to include income from all sources, including:
- Full-time job
- Part-time job
- Side hustle
- Child support and/or Alimony
Note: If your income amount varies from month to month, create your budget using the lowest possible amount you can earn. Any amount over that threshold can go towards meeting your financial goals.
Review your spending habits
According to the 2019 Consumer Financial Literacy Survey, more than half of the respondents indicated that they do not know how much they spend on things such as food, housing, and entertainment.
In order to create a realistic budget, you must know what your current spending habits look like. Figuring out where your money is going is a huge part of the budgeting process.
The most accurate way to accomplish this is to print out your bank statements from the past three months.
First, identify your necessary expenses.
- housing (rent, mortgage, HOA fees)
- utilities (electricity, water, gas, internet)
- debt payments
- cell phone, etc.
These are the expenses you will definitely have every month.
Next, determine your discretionary examples.
- eating out
- sinking funds
- and any other similar expenses go here
These are extra expenses that you could potentially do without.
If you don’t use a bank account or don’t have access to this information, you can begin tracking your expenses for the next 30 days to get a clear picture of your spending. A few ways to track your spending:
- Using an app such as You Need a Budget or Mint. These apps make it easy to track your expenses by linking directly to your bank account. Each transaction is recorded and automatically categorized.
- Documenting your expenses on an excel spreadsheet or in a notebook using pen and paper. This is the most hands-on approach and maybe a bit time-consuming. Be sure to save all receipts so that you don’t forget to add an expense.
Figure out what to pay by when
Don’t forget to record the due dates of each bill, including any bills that are paid weekly, monthly, quarterly, or annually. This will ensure that you’ll never pay another late payment fee again. Knowing the due dates will help you stay organized and plan in advance for any large annual bills such as your auto insurance premium if paid in full.
Review your budget
Add up your total monthly income and your total monthly expenses. Ideally, the amount of your income should exceed your expenses. If your monthly expenses exceed the amount of income you make monthly, consider trimming expenses or looking for ways to earn extra money.
Congratulations! You’ve just created your first budget.
Budgeting is a great way to move you in the right direction, but defining your financial goals is just as important. Your goals will help shape your budget and may impact the choices you make along the way.
Goal setting is the most important part of budgeting. If you don’t budget around your goals, you’ll still end up having nothing to show for your money.
Most people create a budget because they want their money to do something for them. They want to accomplish more. This usually involves:
- Saving for retirement
- Paying off debt
- Buying a house
- Sending your kids to college
- Taking a vacation
- Preparing for an emergency
When you set goals, you’re able to align your budget around achieving them. This will help you understand exactly how much money you’re able to allocate towards reaching your goal(s) per month. Setting goals help keep you motivated. In order for them to be effective, they must be S.M.A.R.T.
How to Set S.M.A.R.T. Goals
To make sure that your goals are clear, concise and obtainable, each one should be:
- Specific (clear, simple, significant)
- Measurable (meaningful)
- Achievable (attainable)
- Relevant (realistic, reasonable)
- Time-bound (timely)
A few questions you should ask yourself when goal setting are:
- What do I want to accomplish?
- Why is this important?
- How long will it take me to accomplish this?
- How can I accomplish this?
- Does this seem worthwhile?
- Does this match our needs?
- What I can do today, six weeks, and/or six months from now to help me reach this?
Perhaps you want to become debt-free, but after years of trying, you’re still in debt. Or you may have told yourself that you can’t pay off your credit cards or student loans because you don’t make enough right now and you’ll start once you get a raise.
Setting S.M.A.R.T. financial goals can actually help you reach these goals. Once you set your goals, you’ll determine the real reason why you haven’t paid off your credit card or student loan debt because your timeline was unrealistic or your plan was way too vague.
An example S.M.A.R.T. financial goal is: I want to be debt-free by January 2021.
Adjust your vision, rephrase your plan, and watch your dream become a reality.
Remember that budgets should be flexible and are meant to fluctuate month to month. So, don’t get upset if you spend more than you planned to in one category one month, that’s okay. Just roll what’s needed from a different category. You can always try again next month. The goal is to ensure that you’re spending within your means and not going into debt.
Budgeting takes some practice, but once you get the hang of it, you’ll reach your financial goals in no time.
Do you have any other tips for beginner budgeters?