How to Budget for Beginners

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A quick pass on Google will show you that there are countless different ways to budget. You’ll read about the 50-30-20 rule, zero-based budgeting, and the envelope system. While everyone has a unique budgeting approach, I will walk through the basics of how to budget with any budgeting system. Also, I’ll briefly explore some of the most popular budgeting tools available, like YNAB and Mint.

1. Make a Commitment to Budgeting

Budgeting is a game-changer. It shows you where your money is going and gives you the power to decide how to use your money towards the things that are important to you. 

For a budget to work, though, you must commit to using it. A budget that sits in the background doesn’t work. 

My Budgeting Story

Let me share a quick story. Before I learned how to budget properly, I would budget once a year. I would go through an extensive list of categories and set a budget that seemed like a reasonable amount to spend. 

Turns out, though, I wouldn’t look at that budget once in the upcoming year. At the end of the year, I had exceeded my “budget” in almost every category.

This is not budgeting. This does not work. This “budget” was useless. But when I switched to a real budget, I saved over $1,500/month (read about my story).

It is not until you commit to using a budget that it can be a useful tool for your finances. Now, this does not mean you have to spend your entire life staring at a budget. 

How to Budget

The ROI (Return on Investment) of Budgeting

I love personal finance, and I do look at my budget almost daily (less than 30 seconds a day). However, for most people, I think it’s possible to budget effectively in 20 minutes or less per month.

Over time, you will figure out how your budget works for you. In the beginning, you may need to look at it a bit more. But as you adapt your spending habits, you will find that you need to look at it less and less as you gain a sense of where you’re at with your finances.

Budgeting is a commitment, but it is perhaps the single best payoff that exists in personal finance. Yes, you can earn 7% on average in the stock market. But budgeting has “earned” me more like 30% because that’s how much I was able to cut my spending. And that was just by actually understanding my financial picture, not by doing a slash and burn on my spending.

Before I jump into the mechanics of budgeting, I want to address one final point. The word budget feels like a bit of dirty word. People think it means they can’t drink Starbucks every day or go on vacation or go out to eat.

Quite the opposite is true. Budgeting allows you to spend money on anything you want – as long as it is important to you and, when you add up all of your spending, you live below your means.

Budgeting isn’t about being hamstrung. It’s about making your money do the things you want it to do.

You may also ask who should budget. My answer is simple. Everyone. I know people that make $300,000+ per year that budget. It doesn’t matter what your income is. Budgeting allows you to work towards your financial priorities. 

If you’ve made it this far, and are willing to commit to budgeting, let’s dive into the mechanics of how to budget. 

Budget Jar

2. Make a List of Savings Goals

The first step in setting up an effective budget is to identify savings goals, both near-term and long-term. Here are some examples:

  • Build an Emergency Fund
  • Set Aside Money for Retirement
  • Buy a House
  • Buy a Car
  • Plan a Vacation
  • Save for a Wedding

These are just some examples, but everyone will have their own specific goals. Now for each of these goals, put a dollar value to the goal and attach a date.

As an example, let’s say you want to take a vacation six months from now, and that vacation will cost $3,000. You’ve just decided you need to save $500 per month for the next six months to make that happen.

The exception to the dollar value/date rule is retirement – aim to work towards 20% of your income towards that goal every month, and then build the other goals on top of that. 

You can also make a list of smaller savings goals for things like electronics, clothing, etc. 

By building a list of savings goals, you are deciding what your values are when it comes to money. If you can create a budget that helps you work towards those goals every month, you’ll learn that saving on a budget is in fact possible.

3. Make a List of Expenses

Once you have a list of savings goals identified, it’s time to lay out all of your expenses. Let’s start with living expenses.

Living Expenses

Below is a list of living expenses that show up in my budget (brace yourself, it’s a long list):

  • Mortgage and HOA Dues
  • Utility Bills (Gas, Water, Electric)
  • Insurance (Car, Homeowner’s, Umbrella, Life, Disability)
  • Home Security (ADT)
  • Internet/Cable/Telephone
  • Food (Restaurants and Groceries; suggest separating these)
  • Coffee Shops
  • Gas
  • Car Wash
  • Bars
  • Dry Cleaning
  • Haircut
  • Public Transportation (Tolls, Subway, Etc.)

I realize this list is long, but it is reasonably comprehensive. If you want to simplify your budget, you can have a miscellaneous category to cover things like car washes, dry cleaning, etc. Of course, there are things on this list that may not be relevant to you, and there are things that are relevant to you that aren’t relevant to me. But this should get you started. 

These are expenses that I incur nearly every month (with a few exceptions). For now, don’t worry about setting dollar amounts for each of these categories, I will get to that later. 

Once you have a list of all your regular expenses, let’s dig into one of the most common budgeting mistakes. Most people don’t plan for their infrequent expenses. 

Spending Habits

Infrequent Expenses

Your infrequent expenses are expenses that don’t happen every month and are easy to forget about until they occur. These expenses can easily blow up your budget because they catch you by surprise. 

Set money aside every single month for these infrequent expenses. This is one of the most powerful money tips I can give you.

Here is a list of infrequent expenses that make an appearance in my budget:

  • Property Taxes
  • Insurance (if not paid monthly)
  • Auto Maintenance (sorry, it’s not a surprise when your car needs maintenance)
  • Home Maintenance (again, roofs don’t last forever – not a surprise)
  • Annual Credit Card Fees (only have these if the perks more than cover the fees)
  • Medical (to cover prescriptions, regular doctor visits, etc.)
  • Car Registration/Vehicle Property Tax
  • Subscriptions (Amazon Prime, AAA, etc.)
  • Giving (e.g., I donate to charity each year in December and set money aside through the year)
  • Gifts (holidays, birthdays, etc.)

All of these expenses tend to be lumpy, be it $1,000 to get your car fixed or spending $600 on holiday gifts. By setting aside money throughout the year, these expenses become guilt-free when they do happen. And you’ll lower your stress in the process. By the time the expense hits, you will already have the cash in your account to cover it. 

Budget Planning

4. Give Every Dollar a Job

Once you have a list of all your expenses, it’s time to figure out how much you can afford to put in each of those categories. 

Let’s introduce a concept called zero-based budgeting. What this means is that every dollar of income is given a job. Let’s assume your income is $3,000 per month. For simplicity’s sake, suppose you have three budget categories: housing, a vacation fund, and retirement. 

Let’s start by saying you’ll save $600 (20%) towards retirement, your housing costs $1,000, and you put $1,400 towards your vacation. You’ve now budgeted every dollar of your income. This is a zero-based budget. By giving every one of your dollars a job towards your financial priorities and expenses, you’ll have a much clearer picture of where your money is going.

Suggestions on Setting Amounts for Each Category

  • Start by budgeting for your goals (retirement, savings, etc.) and then see what is leftover for your expenses. This should start to give you a sense of what you have to live on each month. 
  • Next, budget for expenses you can’t control, like property taxes and insurance. Once you budget for all the needs, you start to have a sense of how much is left for flexible spending (e.g., how much can I spend on restaurants this month). 
  • Know that these amounts are not set in stone. They can, and should, be changed as you learn what your spending habits look like, and you can shift money around within your budget categories based on your needs. 
  • Aim to make your budget proactive and not reactive. If you only use a budget to document when you “miss the mark”, it won’t be nearly as helpful. Instead, ask yourself, “can I afford this” when making purchases. Remember, if it’s important to you, it is possible to find room in your budget to make it happen.
  • Aim to live on last month’s income. What do I mean by this? Once you start getting your finances under control, you will begin to have money in your bank account that isn’t spent right away. It can be tucked away for goals, and when you do spend money, you spend money you earned a couple of months earlier. 

5. Choose a Budgeting Tool

Again, everyone has a different budgeting system that works for them. Whatever that system is fantastic.

Some people use a good old-fashioned Excel spreadsheet. Others choose an app. And some people physically put money in envelopes (this seems like a lot of work). 

Whatever the tool is, find one that works for you and helps you stay on track. Without a budgeting tool, you’ll never be able to say on track and use it month after month.

If you’re looking for the budgeting tool I recommend most often, it’s YNAB (You Need a Budget). The reason is that it works on the principles of zero-based budgeting, it’s super easy to use (once it’s set up correctly), it’s proactive and flexible enough to adapt to your changing budgeting needs, and only takes a few minutes per month to use. 

While there are other options out there like Mint, I don’t think they work nearly as well because they are reactive (documenting what has already happened) and aren’t nearly as flexible. If you want to learn more, check out our YNAB vs. Mint comparison.

How to Budget:  A Summary

Learning how to budget doesn’t have to be complicated or scary. The basic principles are pretty simple:

  1. Commit
  2. Make a List of Goals
  3. Make a List of Expenses (recurring and infrequent)
  4. Give Every Dollar a Job
  5. Choose a Budgeting Tool That Works for You

Like I said, I know some people get wigged out at the idea of a budget. A budget, however, doesn’t have to be scary or be used as a tool to tell you “no.” Instead, use a budget as a tool to reach the goals that are important to you. 

Get started budgeting today, and then watch how small changes can make such a big difference in your finances. I can’t wait for you to give it a try!

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