How to Budget for Beginners

I 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. 

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.

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:

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.

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:

Final Thoughts