May 20, 2021
Keeping track of all your hard-earned dollars can feel like a full-time job. There are bills to pay, a fridge to stock, and hopefully, some leisure activities to enjoy in between.
Not unlike a full-time job, your money management requires a fully optimized system: a budgeting process. Tracking your incoming revenue and outgoing expenses can be beneficial to your financial — and mental — health, especially when you learn how to budget for the long term.
In this budgeting for beginners guide, we’ll outline what a budget is, how to budget, and why budgeting is important.
A budget is a plan, or a road map, that helps you prepare for the future. Anyone can create a budget, from a single person to a large corporation. It’s a critical tool that details the relationship between two key factors:
Income/Revenue – How much money you (or your business) brings in
Expenses – How much money you can afford to spend on necessities, emergencies, and luxuries while meeting your financial goals
Creating a personal budget usually involves tracking expenses to identify your current financial situation, then adjusting those spending patterns by creating an itemized list of where your money should be going each month.
There are also different types of budgets. For example, if you’re in debt, a budget can help you reduce or eliminate the funds you owe. If you’re trying to prepare for retirement or make a big purchase, a budget can help you save for that, too. It can be tailored to your unique financial goals.
According to a 2021 report from the credit bureau Experian, in 2020, the average total debt per consumer in the U.S. was $92,727 (including mortgages).
Although it may feel like a chore, creating a budget that realistically weighs the money you have against the money you currently spend — and may need to spend in the future — can be very rewarding for your well-being (financially, emotionally, and beyond).
Here are just a few reasons why you should budget your money:
Avoiding drowning in debt by unknowingly spending money you don’t have
Working toward eventual — stress-free — retirement
Preparing for emergencies, from stock market drops to hurricanes
Identifying and eradicating bad spending habits for good
Eliminating the anxiety around spending by creating clear boundaries
Plus, you might just save enough dough to go on that much-deserved trip to Fiji you’ve been dreaming about.
Now that you understand the basics of a budget and why creating your budget can be so beneficial let’s explore some budgeting tips.
Developing a budget is a personal endeavor — no one can tell you how you should spend your money. Figuring out what you want and following these steps will help you create a budget that you’ll actually be able to stick to:
Identify your goals – Without a destination, there’s no use in creating a road map. The first step is to decide what you want. Let’s say you want to eliminate your current debt and put away $5,000 for an emergency fund. The next step is figuring out when you’d like to do it by — over the next 14 months, for example.
Establish strategies – Strategies may include eliminating certain spending, like canceling your monthly gym membership and quitting your takeout habit. A strategy could also look like refinancing your debt by putting your largest lump sum on a new, 0% line of credit.
Evaluate their effectiveness – Maybe your gym membership wasn’t as much of a drain on your bank account as you thought, or maybe refinancing isn’t the best option for you. You can always develop and implement new strategies based on your experiences.
Set periodic targets – Setting realistic mini-milestones within your overall financial plan can help keep you on track and motivated to keep saving. This could look like a certain amount in savings at the end of each month or a slow and steady reduction of some of your most costly expenses.
These four steps should help you achieve success — but where should you start?
While some folks may be able to hold limitless facts and figures in their heads, it’s best to translate your personal budget to paper or a virtual platform, especially when you’re just starting.
Consider tackling the budgeting process with the following practices in mind:
Embrace technology to identify spending patterns – When you’re still getting a handle on financial management, it can help to take some of the guesswork out of the equation. There are plenty of automated apps or programs that calculate and report your various expenditures and identify adjustments that will help you reach your goals.
Meticulously track your expenses – You probably know that your mortgage payment is $1,600, and you owe $150 in utilities on the third of every month. But do you remember signing up for that monthly $15 Hulu subscription? What about all the fancy dinner parties you’re planning on hosting over the next few months — and the hefty bill that comes with them? Creating an itemized account of exactly where your money goes daily, weekly, and monthly helps put things in perspective.
Give yourself a strict monthly allowance (and stick to it!) – Budgeting may seem restrictive, but it can actually set you free if you follow your plan. After subtracting all the necessary expenses, you’ll be left with an allotment for discretionary purchases — wants, not needs. With this monthly allowance, you know exactly how much you can comfortably spend without having to worry about affording your other expenses. After a few months of strict adherence to your budget, you’ll learn where you can and can’t afford to take a few liberties.
Identify thoughtful, doable substitutions – Sustainable spending is one major budgeting goal. By taking money from one expense, like a monthly clothing rental service, and investing in a nice leather jacket you’ll wear year-round, you can reduce your overall spending without eliminating things you want or need. Conscientious substitutions can help you wrap your mind around budgeting, especially if you’re new to the idea of conscientious spending.
The key to creating an effective monthly budget is to evaluate your current spending behavior and identify actionable steps towards better habits. Here’s how you can go about doing that:
Calculating your net income (your take-home pay after deductions).
Adding up your necessary fixed expenses like rent, mortgage payments, car insurance, and so on.
Spending at least one full month tracking and sorting your variable spending. Separate these into categories like:
Toiletries and other household necessities
Dine-in, take-out, or food delivery
Education or professional development
Using the monthly overview to identify where you’re spending the most money and where you can (or perhaps should) cut back. You can also check out our blogs “Eating on a budget” and “Ways to travel on a budget” for more ideas on how to reduce your expenses.
Pinpointing a monthly savings goal, usually a percentage of each paycheck. Calculate how much spending you’d need to cut from various discretionary categories to achieve this goal.
Creating a budgetary breakdown by allocating your monthly net income to these various expenses, starting with fixed expenses, then necessary variable expenses like food and toiletries, then savings, and finally discretionary spending categories.
A good monthly budget is the one that works for you, although financial advisors might bristle if they hear you’re spending 80% of your monthly income on shoes, hats, and purses. An often-recommended monthly budget is called the 50/30/20 rule. Based on your after-tax income, your budgetary breakdown would look like this:
50% on necessities – Within this category, most experts recommend spending no more than 30% of your income on rent. That leaves 20% to put towards groceries, utilities, transportation, minimum debt repayments, and so on.
30% on wants – This is your “discretionary spending,” including going out with friends, buying clothes, seeing movies, and other everyday activities that you enjoy but could live without.
20% in savings – A hefty figure for beginners, 20% is the gold standard when it comes to creating a healthy financial future. If you can’t meet this amount early on, start putting away 10% or even 5% of your monthly income and try to work your way up.
While this is an aspirational monthly budget, it isn’t always realistic based on personal circumstances.
A sample budget is a template that you can use as a starting point in creating your personalized budget. You can also find sample budgets that more closely match your lifestyle, including individual, family, and couple’s budgets or templates with an emphasis on building savings, paying off debt, or another financial goal.
Here’s a sample budget from an individual with an after-tax income of $4,500:
Rent – $1,350 (30%)
Savings – $675 (15%)
Transportation – $540 (12%)
Groceries – $360 (8%)
Utilities & phone plan – $270 (6%)
Clothing – $225 (5%)
Entertainment – $225 (5%)
Medical – $225 (5%)
Holidays & gifts – $225 (5%)
Dine-out & take-out – $225 (5%)
Miscellaneous – $180 (4%)
Learning how to budget money doesn’t have to be an overwhelming, insurmountable chore. In fact, it can set you free by creating order and eliminating uncertainty. Understanding your daily, weekly, monthly, and annual expenses is critical to maintaining your financial health, regardless of your current situation.
With mobile apps like Tally, you can view all of your credit card debt in one place. This transparency allows you to manage paying off each card in a way that fits into the comprehensive budget you’ve created.
A realistic spending plan can help you save money for emergencies in the worst case and a lavish vacation in the best case. It’s never too late to start.
Ready to begin budgeting and tackling debt? Check out Tally.