I’m going to tell you the secret to getting control of your finances. Ready? Do a budget. Yeah, I know. You’re rolling your eyes. Nobody wants to do a budget. You might not know how to write a budget. But I really believe that a budget is the most important tool for you to use to reach financial freedom. It doesn’t have to be so scary or overwhelming. I’m going to walk you step by step through how to create your first budget.
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What is a budget?
A budget is a written plan that tells your money where to go. Writing down a budget helps you align your spending with your goals. With a budget, you will be able to know where every single dollar you make is going and prioritize your spending.
Financial Goals are Important
Set your financial goals before you start trying to write out a budget. It will be much harder to know where to send your money if you don’t have a master plan.
Your financial goals need to align with your life goals. What do you want to achieve? Think about your dream life and what your financial situation would look like. Then set your goals to align with reaching your dream life.
Once you know what your goals are, you’ll be able to prioritize categories in your budget. You can cut out spending that is no longer important to you so you can put money toward reaching your goals instead.
Paper vs Excel vs App
You will find you have a preference on where you keep your budget. I would recommend just writing your budget down on paper to start, but I’ll go through a couple options here that can make budgeting more convenient. Find the method or a combination of methods that make sense to you and help you budget efficiently and effectively.
Good old fashioned pencil and paper is the simplest way to get started budgeting. Just grab a notebook or planner to keep your budget in and get started!
I personally keep my budget in an excel spreadsheet. Spreadsheets are kind of my thing since I do them for a living (I’m a CPA) so I really didn’t think about where I wanted to keep my budget. It has worked out pretty well for me though. I don’t have to worry about doing my calculations wrong since Excel will do it for me. My budget spreadsheet is kept in my Dropbox account so I can access it on any of my devices at any time.
There are so many apps you can download to do your budget and have across your devices. These can provide a little more structure than creating a budgeting from scratch on paper or in a spreadsheet.
Dave Ramsey has a budgeting app called EveryDollar. It is based off a monthly budget method and the envelope system. There is also You Need A Budget, which is an entire financial management system along with the app. Mint is also a popular money management app. There are tons of options, just try some out until you find something you like. There’s no wrong option here!
How do I create my first budget?
The first step of actually writing out your budget is deciding what period you want to budget for. A lot of people budget on a monthly basis. You can also do a budget per paycheck, biweekly, or weekly. Pick whatever period makes the most sense for your situation. I get paid on the 15th and last day of the month, so I budget per paycheck.
Once you decide what your budget period will be, write down your income for that period. If you have a variable income, choose the minimum amount you make on average. You want to be conservative if you aren’t guaranteed the extra money. If extra money does come in, you can add it to your budget later.
Make sure you take into account all forms of income. Paychecks, reimbursement checks, bonuses, etc. You don’t want to leave anything out or you’ll end up spending it on something that doesn’t align with your budget and your goals.
Once you know what your income is going to be for your budget period, you can start to calculate your expense categories.
The Zero-Based Budget Method
I always do a zero-based budget. The zero-based budget method is when you budget out every single dollar you have coming in. When you total up everything for the month, your income minus all your expenses and payments should equal zero.
Doing a zero-based budget forces you to give every dollar a job. It’s much easier to waste money on things that don’t put you closer to your goals if you don’t give every dollar a purpose.
What are my expenses?
Once you decide what your expense categories are going to be, we’ll use the zero-based budgeting method to allocate the rest of your income. Sit down with a calendar and write out a list of all of your required bills and when they are due. I’m talking things like rent, power, water, Netflix, car payment, etc. These are required to be paid, so all of these are your first expense categories.
Next, think about all the other things you spend money on during the month. You’ll need a grocery category and a gas category (most likely). If you eat out regularly you will probably want a category for that. I have a category for pet supplies. Create a separate category for everything you buy within a month.
This step can be really hard if you don’t have a good idea of what you spend money on. Most people actually have no idea what they really spend their money on when they go to write their first budget. There are a couple of things you can do to help with this.
First, pull all your bank statements or look at your online banking for the past 6 months. I’d recommend printing it all out and going through it with different colored highlighters. Have one color highlighter for groceries, one for eating out, one for entertainment, etc. Then total them up for each month. This will give you a basis for how much you spend in different categories and what categories you actually need.
When I wrote my first budget I just tracked my spending for an average month before actually writing it out. I wrote down everything I spent money on for an entire month (you’re going to be doing this for the rest of your life anyway so you might as well get started now). This method enabled me to separate my spending into categories as the month progressed, so I had a very good idea of what my budget needed to include when I was done.
Make sure you consider expenses that don’t happen every month or period, like birthdays, holidays, and special events. You’ll need to adjust your budget accordingly each period to include these things.
Setting Budget Categories
So budget categories are based on what types of expenses you have. Now we’re going to actually write out your budget and set up your budget categories.
Start by writing the income you figured out earlier at the top. Write all streams of income and total them up. This will be the income section. Here’s an example of how this should look:
The numbers in this example are all totally made up, but they give you an idea of how things should go.
Next, we’re going to add all the bill categories to the budget. Write these expenses out in order from most necessary to least. So you have to pay your rent more than you need to pay for Netflix, so put rent higher on the list than Netflix. This will make it easier to cut things if necessary.
Finally, write down the rest of your expense categories. Again, do this in order from most necessary to least necessary. These categories will be the trickiest because you’ll have to guess how much you’ll need in each one.
You need to do a new budget every month or paycheck (whatever period you chose). There will be different things you’ll need to account for at different times. One month you might have 3 birthdays to buy gifts for and the next you won’t have any. Increase your gas category if you will be driving somewhere out of the ordinary. Adjust your budget based on what’s going on in your life.
At the very end of your budget, anything you have left after covering all your bills and expenses should go toward reaching your financial goals. In this example, I put it towards an extra debt payment. I subtracted all the expenses from the total income to get the total amount of income left.
There you go! You’ve written your first budget!
Not as scary as you thought? It definitely can be overwhelming when you think about sitting down to look at your finances for the first time. Once you get a feel for your budget categories, you can start adjusting them to help you put more towards your goals (like paying off debt!).
Don’t try to cut down on spending in any of your budget categories the first month. Your first month of budgeting is not going to go well. It takes time to get used to new habits and build new skills. Budgeting is a new skill and controlling your spending is a new habit.
The first few months of budgeting are going to be very frustrating. You aren’t going to stick to your budget 100% and you’re going to get your categories wrong at the beginning. This is okay!
If everyone was naturally good at budgeting then everyone would be great at handling their money from the start. It will take time to get good at it. Don’t give up! I promise getting good at budgeting is worth it when you realize you finally have full control over your money and where it goes.
What if my expenses are higher than my income?
Then you need to cut some expenses or increase your income.
I know that’s easier said than done, but if this is your situation you are going farther into debt every single month. If your budget is full of subscription services like Netflix and Fab, Fit, Fun, you’re going to have to cut those things out. You’ll have to reduce your “fun” spending as much as you can until you can get your finances cleaned up.
If your budget isn’t full of a lot of fun stuff, your situation is a little trickier. If your basic expenses are more than your income, you need to find a way to increase your income. Take a second job, start a side hustle, sell some stuff. You need your income to be at least as much as your basic expenses.
Now that you have your budget written out, take steps to stick to it. Tracking your spending is a crucial part of budgeting. It lets you keep track of what you have left in each category and know what you’re really spending your money on.
The way I track my spending is by using a monthly planner — I use the Erin Condren Deluxe Monthly Planner. I track my spending on each day. Mine is color-coded based on the spending category, but you definitely don’t have to get that complicated about it. Just write down every dollar you spend, where you spent it, and what it was for.
You need this record of where your money is going to continually evaluate your expenses and determine where you continually go over budget. I have also found that knowing I have to track every dollar I spend makes me think more about what I’m buying when I’m shopping. If I’m not going to be happy I have to write it down I’m less likely to buy it.
I also use tracking pages in my budget planner so I know how much money I have left in my main spending categories. For each paycheck, I write down the total budgeted amount for the section. Every time I make a purchase from that category I write it down and subtract the amount I spent from the total amount I had allowed. This enables me to know at any point how much I have left in those categories.
How do I live on a tight budget?
This is the million-dollar question, isn’t it? Sticking to a budget can be very hard. Even people that have been doing a budget for years mess up sometimes. The beauty of a budget is that it doesn’t have to go perfectly every single time. Just having a plan and prioritizing when you send your money can drastically change your financial situation.
If you had more expenses than income or had to cut some categories from your budget in order to reach your goals faster, it can be very hard to stick to your budget. It takes a lot of self-control. Having people around you that will support you and enable you to stick to your budget (instead of enabling you to ignore the budget and blindly spend) can go a long way.