Starting a budget from scratch can feel overwhelming, especially as a beginner.
The good news is, it doesn’t have to be complicated.
In this article, we’ll guide you through a step-by-step process for setting up your first budget.
Additionally, we’ll give you a few rules and tips to help you make the most of your budget over the long-haul.
Let’s get into it!
Why is Budgeting Worth Your Time?
Budgeting is a crucial tool to help you take control of your finances. By creating a budget, you gain an understanding of your income and expenses, allowing you to make informed decisions about your financial future.
With a budget in place, you can effectively allocate your resources and prioritize your spending, saving, and investing.
One major benefit of budgeting is the ability to identify wasteful spending habits.
This can range from small, everyday expenses that quickly add up to larger, more significant purchases. Speaking from personal experience, you’d be amazed how much those seemingly little expenses can add up over the course of time.
By tracking your expenses, you can identify weak spots in your financial life, and make necessary changes to your spending patterns to free up more money in your financial life.
Additionally, budgeting can help you reduce stress by providing clarity about where your money is going each month.
I don’t think it’s any secret that financial uncertainty can lead to emotional stress and anxiety.
Having a solid budget plan in place can give you peace of mind, knowing that you are making progress towards your financial goals.
Finally, budgeting can help you build and maintain a healthy emergency fund. Emergencies can happen at any time–from medical emergencies to unexpected job loss–and having a financial cushion can ease the pain of these kinds of situations.
Ok, are you ready to get to the whole budgeting process? Let’s jump in!
Setting Yourself Up For Success
Separate Your Savings
To set yourself up for success in budgeting, start by separating your savings from your spending accounts. In other words, open a dedicated savings account (at a completely different bank than your checking account) where you can put all your future savings.
By separating your savings from your checking account, you’ll create a buffer zone that will prevent you from making instant transfers and spending your hard-fought savings impulsively. Additionally, it will keep your savings out-of-sight, which will reduce your temptation to spend it.
If you’re looking for a good place to open a savings account, I’m a big fan of the CIT Bank. They offer handsome interest rates (as far as savings accounts go), and you can set up an account online in about 10 to 15 minutes. (Full disclosure: we’re an affiliate for CIT Bank, but only because we personally use and love the accounts they offer!)
Decide On A Single Spending Account (Preferably A Debit Card)
If you really want to set yourself up for budgeting success, I recommend deciding on a single spending account, preferably a debit card.
Consolidating your spending to one account not only simplifies budgeting but also reduces the risk of an expense slipping through the cracks.
Think of it this way, if you spend every penny through one account, then you only have to log into one account to know exactly where your finances stand. You also only have to enter expenses from one account, which makes budgeting a much faster process.
By the way, this isn’t some beginner budgeting technique that I only recommend to newbies! My wife and I have used the “one-account-rule” since the day we got married, and it has made our financial life so simple!
Creating Your First Budget
Ok! We’ve made it. It’s time to create your first budget.
For the sake of simplicity, I recommend using one of two methods for budgeting when you’re first starting out: either a hand-written budget, or the EveryDollar app.
Spreadsheets can also make for a great budgeting tool, but when you’re just starting out, I’ve found these two methods to be the simplest and most effective.
Step 1: Add Up Your Total Monthly Income
To create your first budget, start by listing all your monthly income.
Include your salary, any side gigs, passive income, or any other form of income that you earn each month.
This step is easy when you live on a salary. However, if you’re income is a little less regular, I recommend averaging your income over the last 3 to 6 months, and using 95% of that number as your starting point.
For instance, if your average income over the last 6 months was $4,000 per month, then you would multiply 4,000 x 0.95 to get $3,800.
Use the number you end up with as your starting point.
Step 2: Allocate Money For Saving And Giving
Next, prioritize saving and giving. Allocate a percentage of your income for emergency savings and charitable contributions (like your church). If you’re looking for a good starting point, I recommend starting with 10% to savings, and 10% to giving–but those are just guidelines. ‘
If you need to start smaller, that’s totally ok!
If you’ve never created a budget before, it might seem a little backwards to allocate money to saving and giving first. But this is actually how wealthy people handle their money. Rather than saving the money that’s left over at the end of every month, your goal should be to live off the remaining amount of money after putting money into savings.
By the way, when I say “allocate money for saving and giving” I just mean create a category in your budget for saving and giving, and write down the amount you’d like to give.
Step 3: Allocate Money For Necessary Living Expenses (Food, Shelter, Utilities, Transportation)
Next, I want you to allocate funds for necessary living expenses, such as food, shelter, utilities, and transportation.
You should break these categories into individual line items. At minimum, you should have a line item for each of the following: rent/mortgage, water, electric and gas, food, internet, transportation (i.e. fuel and car maintenance), insurance (home, car, life, etc.).
Do your best to estimate all of these expenses down to the penny. The more specific you are, the better your budget will be.
Make sure to account for all of these expenses and subtract them from your total income.
Step 4: Allocate Money For Consumer Debt (Everything Except Your Mortgage)
After accounting for your necessary expenses, the next step is to subtract your consumer debt payments.
This section should include every debt payment except your mortgage, for example, car payments, credit card debt, personal loans, student loans, etc.
List every debt as a separate line item, and subtract each monthly payment from your total income.
Step 5: Allocate Money For Discretionary Spending
After subtracting your savings, giving, necessities, and monthly debt payments, the remaining money is what we call discretionary income, or income that can be used at your “discretion”.
This income can be used to pay for entertainment, clothing, hobbies, monthly subscriptions, dining out, shopping, or my personal favorite, extra debt payments (to help you get out of debt faster).
For some people, you might not have any money left for discretionary spending. If that’s the case, then you have a couple options; which we’ll cover in the next couple of steps.
Step 6: Eliminate Expenses Until You Hit Your Savings Target
If your expenses are exceeding your income or not allowing you to meet your savings targets, you may need to make some adjustments–some of which might require significant sacrifice.
For instance, if you have a $450 monthly car payment, but you don’t have any room for discretionary spending in your budget, then you may need to sell your car.
Or, if you’re paying for 5 different streaming services, but you don’t have enough money to meet your monthly savings goal, then you may need to drop those services until a later date when you’ve got a little more room in your budget.
Review your budget and identify areas where you can cut back or eliminate expenses. Continue refining your budget until you achieve your savings target.
Step 7: Make Extra Money To Maximize Your Margin
If you really don’t have any room in your budget, and you’ve cut everything you can cut, your only option is to earn more money. That might sound obvious, but it’s the truth.
If this is your situation, look for side gigs, freelance work, or part-time jobs that can provide additional income and ease any financial stress.
Seriously, even a few hundred extra dollars per month can make a huge difference in your life.
Honestly, even if you have plenty of margin in your budget, I encourage you to look for ways to earn extra money. I mean, if you have the opportunity to make some extra money, why not?
There you have it, the 7 simple steps to creating an effective budget. But creating a budget is the easy part. The hard part is living on your budget and sticking to it over the long-haul.
With that in mind, here are a few simple rules for living on your budget.
Simple Rules For Living On Your Budget
Log Your Expenses Daily
To maintain control over your budget, it’s essential to log your expenses daily. Yep, I said daily.
By logging your expenses daily, you’ll become keenly aware of your spending habits, which will help you identify and overcome issues before they become a major problem.
Make it a routine to input your expenses into your budget every morning or night. This process shouldn’t take you more than 5 minutes, so there’s really no excuse for skipping a day.
By sticking to this daily habit, you’ll maintain a clear understanding of your financial situation and avoid any surprises at the end of the month.
If You Didn’t Plan For It At The Beginning Of The Month, You Don’t Buy It
If you didn’t plan for an expense in your initial monthly plan, don’t but it. Instead, wait until next month and work it into your budget then.
In most cases, you’ll probably lose interest and forget about it entirely. However, if at the end of the month you still want it bad enough, you’ll be willing to cut other areas of your budget to make room for it.
This rule is a great way to prevent impulsive spending and keep your budget on track.
If There’s Nothing Left To Cut, Then You Need To Earn More
I know we already discussed this, but when you’ve eliminated all unnecessary expenses and still struggle to meet your financial goals, it’s time to find ways to increase your income.
Explore options such as freelancing, taking on a second job at night, or selling items you no longer need. Boosting your income enables you to save more, pay off debt, and invest in your future.
Actually Move Money Into Savings Before You Spend A Dime On Anything Else
It’s one thing to plan your savings. But planning to save doesn’t move the needle. You actually need to move your money from your checking account to your savings account in order to make financial progress.
So, every time you get paid, before you spend a dime on anything, move your budgeted savings into your savings account. I know it seems simple, but you’d be amazed how few people actually do it.
Always Finish The Previous Month’s Budget (Don’t Just Move On To The Next Month Without Logging Every Expense)
Before moving on to a new month, take the time to review and finalize the previous month’s budget.
Make sure to log and account for every expense—even if it means going back through receipts and bank statements.
By completing your budget, you’ll be able to see the whole picture of your spending, which will allow you to adjust and improve your budget for the upcoming month.
Tips To Make Budgeting Easier (And More Fun)
Set Inspiring Goals To Give Your Budget A Bigger Purpose Than Just Saving Money
Take time to think about your financial goals and how they align with your personal values.
Do you want to save for a specific goal, like taking a trip or buying a house? Do you want to retire when you’re 50? Or, do you want to have enough money to travel the world on the interest you earn from your investments?
Having a clear picture of your aspirations will make budgeting a more enjoyable and meaningful exercise.
Write down your short and long-term objectives, and keep them in mind while you work on your financial plan.
Play Offense (Spin Everything Into An Offense-Minded Approach)
Instead of focusing only on cutting expenses, think proactively about how you can increase your income or create additional sources of revenue.
By adopting a growth mindset, budgeting becomes a strategy to achieve financial freedom rather than a restrictive practice.
Pay Off All Your Consumer Debt (As Fast As Possible)
Debt is a burden that hinders your financial goals. Make it a priority to pay off outstanding debts – especially high-interest consumer debt like credit cards.
Develop a plan to accelerate your debt repayment, whether it’s the snowball method or the avalanche method; choose the one that resonates with you the most.
Watch Out For Weekends
Weekends are notorious for overspending and impulse purchases. Plan ahead to avoid financial pitfalls: cook at home, consider low-cost entertainment options, and prioritize activities that align with your goals.
Establishing a weekend routine will help you stay on track with your budget.
Identify Your Spending Triggers, And Create A Plan To Conquer Them (Emotional, Relational, Physical, Situational)
Understand the factors that drive your spending decisions. Common triggers include emotions like stress or boredom, social pressure from friends or family, physical factors such as hunger, and situational influences like sales and promotions.
Acknowledge these triggers and develop strategies to counteract them, such as exercising, calling a friend, or setting a fixed amount to spend on sales.
My Challenge To You
Budgeting isn’t an overnight process. It takes time, commitment, and daily intentionality. To see real progress in your financial life, dedicate yourself to budgeting for at least six months.
Better yet, commit to a year of all-in budgeting!
The longer you stick with your budget, the better results you will experience and the easier it will become.