LOVE budgets! But I’m kind of weird like that. Crunching numbers and trying to figure out new ways to save money is exciting for me.  And budgeting gives me a sense of control with my money. I realize that not everyone shares my enthusiasm. The majority of people that go without a budget do so because they feel that budgeting is boring. Others avoid budgeting because they consider budgeting a restrictive process or because they have failed at budgeting in the past.

You may be able to relate to one of these common reasons for budget avoidance. But even if you are not excited about budgeting you still NEED a budget. You need a budget..even if you don’t feel as if you have much money to budget. A budget is at the core of any successful journey to financial freedom. I don’t believe it possible to have one without the other. 

How to Budget for Beginners
Creating the Budget is the Easy Part

The hardest part of budgeting is the follow-through. Budgeting is an active process that you have to be engaged in. It would be super simple to just set it and forget it…but a successful budget doesn’t work that way. It’s an active process that requires you to be engaged. In addition to setting up the budget, you have to be intentional about controlling and tracking your spending. In addition to setting up the budget, you have to be intentional about controlling and tracking your spending. At a minimum, you need one checking account and one savings account. It helps if you have direct deposit for all of your income as well. In my household, we maintain a brick and mortar checking account and we keep hold our savings in online savings accounts. 

The Budgeting Cycle: 5 Phases

1. Budget.

This typically happens at the beginning of each month. This is where you decide how much you are going to spend, save, and/or invest in the coming month and breakdown your spending into categories.

2. Spend.

We spend throughout the month so having a plan is very important to successful budgeting.

3. Track.

Do periodic check-ins to ensure that you are staying within the spending boundaries that you set up at the beginning of the month.

4. Reconcile.

This part of the budgeting cycle normally occurs at the end of the month. This is where you compare your actual spending to the projected budget that you set up at the start of the month. If you have been doing a good job of tracking then there should be too many surprises during this step.

5. Revise.

The revision phase is where you have an opportunity to identify what went well and what didn’t go so well in the prior month. Did you overestimate how much you would spend in a category, did you underestimate it? Did you leave a category out? Is there an irregular expense coming up that needs to be accounted for so that it doesn’t wreck your budget in upcoming months? During this phase, there is an opportunity to make adjustments for the upcoming month. Then repeat the budgeting cycle for next month. It does get easier as you move forward.

Reasons Why Your Budget Isn’t Working

  • It’s too lax. Having a budget that includes EVERYTHING that your heart desires kinds defeats the purpose of budgeting.
  • It’s too restrictive. If the budget is too restrictive then the budgeting process will be miserable and you will eventually quit.
  • You create it and forget it. Putting the budget on paper or on a spreadsheet is the EASY part. Living the budget is the hard part.
  • Failing to pay yourself. Warren Buffett says, ”Don’t save what is left after spending; instead spend what is left after saving. At a minimum, you should be saving 10% of your income. If you’re not there, don’t worry, you’ll get there with consistent budgeting and intentionality. 10% is the minimum…if you have other financial goals like buying a home, retiring early, saving for the kids for college…then the savings rate has to be higher….but first things first.

The budgeting process is going to help you identify where your money is going so that you can regain control. It helps if you set your savings on auto-pilot…Designate a specific amount that you can comfortably save per paycheck and then have that amount auto drafted into an online savings account every time you get paid.

Unexpected expenses can wreck your budget if there isn’t a plan to handle them. This is where your emergency fund and sinking funds come into play. Sinking funds are a way to put money aside incrementally for short-term savings goals.

Let’s Breakdown Phase 1

1st: Add up all of your monthly income.

If you’re married and both you and your spouse work (and share finances) include both incomes. Most budgets are created based on take-home pay (net income) after all deductions for expenses such as taxes, health benefits, retirement contributions etc. In most instances, your budget should be created on a monthly basis before the beginning of the new month.

A quick word on irregular pay…If you are not a salaried employee and your paychecks are variable based on hours worked or commissions, it is recommended that you budget based on your lowest month of income from the previous year. It is much better to be conservative with your income estimates if you have irregular pay to ensure that you are not caught by surprise.

Example Income: 

  • Salary 1 (Mr. Smith): $2,500 (after-tax)
  • Salary 2 (Mrs. Smith): $2,100 (after-tax)
    • Total Monthly Household Income: $4,600 ($55,200 Annual Household Income after-taxes)

2nd. Create your spending plan.

Budgeting is NOT about deprivation…rather it is about prioritization. To prioritize you have to first determine if an item is a need or a want.

At the core, our TRUE needs are very basic…food, clothing, shelter, transportation to get to work so that you can earn a living, child care for the same reason, some of us have health needs as well. Beyond that, almost anything else can probably be categorized as a WANT.

It’s really that simple!!

How to Determine Priorities

I’d recommend that you prioritize your budgeting in the following order:

1. Must-Haves (roughly 50% of your income).

These expenses are necessary and cannot reasonably be eliminated from your budget.

Must Haves include expenses such as:

  • Housing (Mortgage or rent)
  • Utilities
  • Transportation costs
  • Food (groceries- not food cooked in 5-star restaurants..or even 3-star restaurants for that matter)
  • Basic clothing
  • Medical expenses
  • Insurance
  • Minimum payments on debts

2. Savings/Investing/Accelerated Debt Payoff (roughly 20% of your income).

Some of you might be gasping at the thought of saving 20%. Traditional financial advice suggests that we aim for a 10% savings rate. This advice is probably based on the fact that the average American saves a lowly 5% of their take-home pay. If 5% is the norm, then 10% is great!

Uh, not really. We are aiming for exceptional, not normal or average. Saving a minimum of 20% will allow us to comfortably set money aside for emergencies, save for retirement and other financial goals, and make extra payments towards any outstanding debts we owe (credit cards, car payments etc.).

3. Wants (roughly 30% of your income).

Wants are the things that are just for fun! If you don’t have room in your budget for fun you may grow frustrated with budgeting because you are constantly in the mode of deprivation.

Wants may include things such as:

  • Monthly manicures
  • Dining out
  • Your occasional Starbucks fix
  • Music lessons for the kids
  • Vacation and Travel
  • New shoes (the adorable ones that you don’t really need)

The good news is that you get to enjoy some fun as long as you keep the spending in balance. The bad news is that these expenses will be the first to get cut if the budget is not balanced or if money becomes tight.

50/30/20 Rule (Balanced money formula in action):

If the fictitious Smith family have a total monthly household income of $4600 they should ideally allocate  the following amounts:

  • Must-Haves (50%): (Total household income of $4,600 x .50)=$2,300
  • Wants (30%): (Total household income of $4,600 x .30)=$1,380
  • Savings, Investing, and extra debt payments (20%): (Total household income of $4,600 x .20)= $920

The percentages can vary…based on your individual situation. The type of budget that you choose is totally up to you and will vary depending on your individual circumstances. But I like the balance money for beginners because you will quickly be able to determine if your monthly spending is out of balance.

Imbalanced spending is a very common problem, particularly if you have never budgeted regularly. When your money is in balance, you always have enough to pay your bills, have some fun, and save for your dreams. In essence, this style of budgeting ensures that you are living well within your means, leaving enough room to enjoy life today and build wealth for the future.

Feel free to adjust your percentages, within reason, to suit your lifestyle. There may be some phases in your life when spending 30% on wants is not a priority for you. You may want to accelerate debt payoff dramatically and are willing to sacrifice fun in the short-term for long-term comfort with a life free of debt.

You may also be interested in retiring early and achieving financial independence, so instead, you may choose to prioritize saving above spending on wants. I am all for that! But don’t make yourself miserable. Remember to enjoy and experience life. Allocate some money for things that you want so that you can enjoy the view along the way to financial freedom.

50/30/20 Budgeting

The 50/30/20 rule is a way to make sure you maintain balance in your financial life. Spending 50% on must-haves is safe and sustainable. If you lose your job or have to take a pay cut you can take comfort in knowing that your bare-bones budget, the essentials, will be covered. If you are currently overspending on your must-haves then chances are that you are failing to save for emergencies and for the future. You may also be depriving yourself of enjoying some things that are just for fun.

If you’re spending 70% of your income on needs alone then it means that you are living above your means…maybe living in a house you can’t afford or driving a car that is too expensive. When you spend too much on needs there is an opportunity cost there. You are sacrificing your ability to save, invest, pay off debt, and have fun…your budget will feel chronically tight and you will have difficulty breaking out of the cycle of living paycheck to paycheck.

Types of Budgets

There are many different types of budgets that you could use but the two commonly used types are zero-based budgeting and paycheck budgeting. Monthly zero-based budgeting simply means that you name every single dollar that you bring in. With zero-based budgeting, there is no such thing as “extra” money. When you look at surplus money as extra money it will quickly slip through your hands and end up being spent on stuff that isn’t important.

Giving every dollar a name gives each dollar purpose. Another type of budget that is great for beginners is paycheck budgeting. Some people struggle with the ability to budget per month because most of us don’t get paid monthly. The vast majority of us get paid bi-weekly. For budget beginners, it makes perfect sense to start out budgeting each paycheck as opposed to budgeting monthly.   

More Expenses Than Money?

Ideally, your income should always exceed expenses so that you are solvent (in the black). If your expenses exceed your income then you are in the red which means that you are probably using credit cards to cover the shortfall…Your net worth is headed in the wrong direction so this needs to be corrected. If you’re consistently in the red at the end of each month you’ll need to determine if you have an expense problem or an income problem.

Expense Problem:

To determine if you have an expense problem, check your budget percentages to ensure that you are not overspending in a particular area.

The Solution:

Penny-pinching and clipping coupons is not going to help this situation. Hard choices need to be made.  You may need to get ruthless with your budget cuts. First, get rid of some of the discretionary spending. You may not be able to afford monthly manicures and pedicures, daily coffees at your favorite coffee shop, and the expensive cable package. This is where prioritization comes in. All of your expenses can’t have equal importance.  

Also, take a close look at your food budget. This is an area that is easy to overspend in. This is an area that I refer to as low-hanging fruit. Your food budget is an category that you can make some minor changes and see immediate savings within the first month.

Eventually, you may need to cut where it hurts!

You might be saying…what do you mean? I’m already hurting..I already had to give up my expensive coffee! Cutting where it hurts means to closely scrutinize your large expenditures (housing, transportation) to see if some drastic surgery is needed! You may be paying too much for your apartment and a move may be in order when the lease is up. You may need to sell your car. These are the decisions that most people avoid. Because they’re difficult! It’s easier to penny-pinch and clip coupons to save a few bucks, but it’s much more difficult to make a lifestyle change that causes some discomfort and disruption to the way you have been doing things.  

If you have cut all that you can then it’s time to do some deeper evaluation. If your budget is bare-bones and you still can’t make ends meet you most likely have an income problem and it’s time to figure out ways to earn more money.

Income Problem:

If your spending falls within the recommended percentage guidelines you might have an income problem.
Let’s be real here. Not everyone is having financial trouble because they are living a champagne life on a kool-aid budget. You aren’t jet setting around the globe while making $40 K per year. You may very well be spending within the recommended categories and living modestly and frugally but you still have trouble making ends meet. If that is the case then you may have an income problem…
Inflation is real..Things are expensive and unfortunately, incomes are not keeping up with the rising costs of goods and services. In other words, prices are rises and you are not necessarily getting raises at the same pace that prices are creeping up. To complicate matters you may also be sending a large percentage of your income to debt payments.

The Solution:

Multiple streams of income! Work towards getting to the place where you have income flowing in from more that one source. This will lessen your dependence on your employer and provide you with additional income to pay off debt, save, invest, and advance your financial future.

Final Thoughts

Writing your budget down is the easy part. Living that budget on a daily basis is much more difficult. It is important to track your spending to ensure that you stay within the budget estimates that you wrote down at the beginning of the month. That is the true essence of budgeting. It goes beyond writing it down. You have to live it!

I don’t like keeping track of a ton of receipts so I prefer to use cash envelope budget for the bulk of my everyday household spending. There is no need for complicated spending records or stacks of receipts when you use cash envelopes. The cash is simply logged on my Excel spreadsheet one time and I divvy up the cash into the various envelopes and then I stop spending when the envelopes are empty. 

Now, repeat each month. Easy right? Well, the math is easy. Changing the behavior is the difficult part.

Now it’s time to do the work of creating your budget and sticking to it! What’s your biggest budget struggle?