One of the most prominent pieces of personal finance advice people get is to start a budget. Budgeting is the key to gaining control over your finances, but how to start?
Most people have no idea how they spend their money. As a result, some spend more money than they earn and end up in debt. Budgeting for the first time can be intense, especially if you are afraid of checking how much money you are actually spending. Creating a personalized budget is the best way to create a roadmap for your money and develop sounder spending habits.
If you have decided you need a budget to organize your finances better but have no idea how to do it, you are in the right place. So let's learn how to start budgeting.
What Does A Budget Do?
A personal budget makes you understand how much money you are spending and how you can better control and plan what you will do with your money. For example, if you have set a financial goal of saving $200 every month, a budget can help you check if that's doable and what expenses you need to eliminate to achieve that purpose.
When you have a budget, you have a clear picture of your finances. You know exactly how much money you make and check where you spend your money. Unfortunately, sometimes you don't even realize you are spending $300 on things you don't need, like that quick meal during lunchtime at work or that online subscription you never use.
If you struggle financially every month, but have no idea why your money disappears so fast, budgeting will show you what is going on. Budgeting has its advantages and disadvantages, but one thing is for sure, money management can't be avoided. Otherwise, you will end up in debt.
Why Should You Budget?
When done correctly, a budget can be precise in arranging how you will use your money. It can tell if you spend more money than you earn and if you can afford your current lifestyle.
Imagine that you earn $2,500 every month but spend $2,600 without even realizing. That can lead to overdraft, which leads to debt. Maybe you are using money from your savings account because you think it's a one-month thing, but you keep repeating it because your salary is not enough to pay for all your expenses.
Budgeting is important because it gives you control over money, helps you achieve your financial goals, stops you from overspending, and improves your overall quality of life.
How To Start Budgeting?
To start budgeting your money, you need to determine why you want a budget, gather all the financial documents you need, add up all your income and expenses, decide on your financial goals, learn about different budgeting methods and pick one. Then, you use the right budget tools, implement the chosen budgeting method, keep track of the budget, evaluate it, readjust it, and try it again.
If you are budgeting for the first time or have tried to have a budget before but failed numerous times, these are the steps you need to take to ensure your budget works for you.
1 – Determine Why You Want A Budget
One of the biggest mistakes in why people fail to implement a budget successfully is that they don't specify why they want to do it. Usually, budgeters tend to have a specific financial worry that makes them start to control how they spend their money.
For example, if you say you want to start budgeting your earnings to save more money, that's great motivation. It's an excellent way to determine why you want to start budgeting. Here are a few other reasons why you could want to begin budgeting:
- To check how you spend your money.
- To not live above your means.
- To stop getting into debt or more debt
- To break the paycheck-to-paycheck cycle.
- To help you prepare for emergencies
- To have control over your money
- To achieve a financial goal.
Keep in mind that determining why you want a budget is your motivation to start one and not the reason why you will keep doing it. For example, suppose you decide you want to lose weight. In that case, you buy the right fitness equipment and start classes, but eventually stop if you don't have a more specific reason behind it, like losing a particular amount of weight or gaining more muscles, etc.
The same happens when you start budgeting your money. Again, your initial motivation is saving money, but without stipulating how much you will save every month and for how long, you will get bored of budgeting and stop it. That's why step number five, having financial goals, is meaningful.
2 – Gather Your Financial Paperwork
To create a budget that works and allows you to follow it without any significant problems, you need access to all your financial documents.
Some financial paperwork you will need:
- The simple budget template
- Bank statements
- Credit card bills
- Mortgage statements
- Essential bills statements
- Cash payments receipts
- Investments accounts
Have all your financial records before you start budgeting. Otherwise, you may give up when you start seeing you don't have all the information you need and just leave it for another day (or in six months when you remember you never started one).
Budgeting is not easy. You need to check all these documents to create a monthly average of how much you earn and spend. Never guess or try to estimate when it comes to budgeting. You want to be the most accurate possible.
3 – Add Up All Your Income
Now that you have your simple budget template downloaded, you can add all your income to ensure you know how much money you have available next month.
A few examples of sources of income:
- Business income
- Income from investments
- Money gifts
- Side gigs
- Selling something
If you are a freelancer or have a variable income, I suggest that you check how much money you received in the last six months and estimate how much you will receive in the following one. Always add less than more to ensure you don't overspend.
If you work for someone, they will deduct the income tax and national insurance from your pay, but you may want to check how much taxes you will pay if you work for yourself. You can use the free tool on the IRS website. However, if you have any questions, it would be better to speak with a tax professional.
4 – Add Up All Your Expenses
After you know exactly how much money you will receive for the next month, you need to comprehend how you have been spending your money. Check the last three months of expenses to be more realistic with how much money you spend monthly.
Check all your financial paperwork and start adding your expenses to the simple budget template to know where your money is currently going.
A few examples of expenses are:
- Utility Bills (Water, Gas, Electricity)
- Any Loans
- Household Products
- Entertainment Subscriptions
- Dining Out
- Memberships (gyms, professional organizations)
I wouldn't worry too much right now about categorizing your expenses. I would just add anything that you spend your money on to the template. Then, when you choose your budgeting method, you can organize this section better.
Keep in mind that some months have irregular expenses, like birthdays, holidays, events, annual car inspections, property taxes, etc.
For some people, checking their expenses can be a big shock on how much money they are spending every month, but you should remember this as an opportunity to cut some costs and improve your financial life.
5 – Determine Your Financial Goals
By now, you know how much money you receive and spend monthly. You know your financial situation, and you can set financial goals.
This may sound obvious, but without realistic financial goals, budgeting is not worth it. You will not have the right motivation to keep moving forward and follow the budget you set at the beginning of the month.
Examples of financial goals:
- Buy a house
- Pay debt
- Invest your money
- Build good credit
- Save for retirement
- Save for college
- Set an emergency fund
- Buy a brand new car in cash
- Save for holidays
Your financial goals need to be specific and have a time frame. For example, you cannot only say you want to save money to go on holiday. Your financial goal needs to be something like, “I want to save $2,000 in six months to go to Portugal”. Or “I want to pay $5,000 in my car debt in twelve months.”
When you set your financial goals, you can choose the proper budgeting method for your needs and adjust it to ensure you achieve them. You will know exactly how much money you can put aside to accomplish each of your goals. Financial goals also increase your motivation to stick with your budget.
6 – Learn About Different Budgeting Methods
Now it's time for you to learn the different budgeting methods and choose the one that you think is the most suitable for your needs and financial goals.
The 50/30/20 rule budget is the most popular one since you allocate 50% to your needs, 30% to your wants, and you save 20% of the money. It's usually the budget style that many choose to start budgeting, but in the case is not suitable for you, learn about different budgeting types like one of the following:
- 60/30/10 rule budget
- 70/20/10 rule budget
- 50/40/10 rule budget
- 30/30/30/10 rule budget
- 80/20 rule budget
- 60/40 rule budget
- Zero-Based Budgeting
- Extreme Budgeting
- Reverse Budgeting
- Envelope Budget Method
- Digital Envelope System
The most important is that you read and learn about all the different budgeting types available to make the best judgment when picking the right one for you. Remember that everyone's budget is distinct, so what is suitable for me may not be for you and vice versa.
7 – Pick A Budgeting Method
After you have learned the different types of budgets you can implement, it's time to choose one and stick with it to see if it works. Remember that your budget needs to cover all your income and expenses, including any bills, debt repayments, investments, savings, etc.
Try to choose a budget you can stick with, and be realistic about your chances of actually implementing it as you are supposed to.
For example, don't choose the 60/30/10 rule budget if you know it's impossible to save 60% of your income. Always pick the one you can implement the best according to your needs. You can always change next month to a different one if that doesn't work.
8 – Choose The Right Budget Tool
The next step is to decide on the logistical part and decide what tool you prefer when creating your budget. For example, some people like to use an Excel spreadsheet, others use pen and paper with a template ready, and others prefer a more technological approach with a budgeting app.
Excel is usually the program I choose to work with for my websites and personal finances because it's easier to make adjustments and check any information you need quickly. Learn how to make a budget in Excel.
Having an Excel spreadsheet helps you check how much income you have left for the month, how much you have spent, how much you will allocate to your savings account next month, etc. This way, you properly budget your money.
If you find excel too complicated, you can purchase spreadsheet templates with formulas included where you just put the numbers, and you automatically get everything done for you. If not, you can always try the following budgeting tool.
Printable Budgeting Templates
Most people prefer to budget with paper and a pen, so having a suitable printable budgeting template to help you organize and have a quick look at your finances, is the best option.
A printable budgeting template will help you keep on track and manage the details of your budget, so you know how much money you need to allocate to each category and how to do it. No one knows by memory how much money they can spend on each bracket, so a budget template will help you to have a quick overlook of your finances.
If you are into technology and love to do everything digitally, you can always use a budgeting app (which I found very easy to use). Usually, you connect the budget app to your bank account and credit cards to automatically download any transaction you make and categorize the spending to match the budget you have chosen on the app.
Here are some examples of budgeting apps you can use:
Mint is a free budgeting app that offers the option to create your budget. It tracks how well you keep to your budget limits in case you link to your bank account and credit cards. You can set money limits, choose categories, or specify how frequently each expense occurs.
You Need A Budget
You Need a Budget is a very popular budgeting app that costs $14.99 per month or $98.99 yearly. You can try the first 34 days for free to check if you like it. After that, you can get detailed reports, free live classes, set spending limits for each category, and connect your bank account and credit cards.
YNAB states new budgeters generally save $600 in their first two months and more than $6,000 in their first year. Why not try for free and see if you save money?
If you keep overspending your money, you can try PocketGuard. Its components focus on helping users manage not to overspend. You have a free version with limited customization (only one goal) and the PocketGuard Plus, which costs $7.99 per month, $79.99 per year, or $99.99 for a lifetime membership.
It's a great app that reminds you when your credit card bills are due, how much money you can spend, set financial goals, where you spend your money, etc.
9 – Implement The Chosen Budgeting Method
This is the part where you take action and implement the budget you think is the most suitable to your needs and the budgeting tool you think will be the best to keep track of your spending.
You want to add how much income you will have for the month and how much money you have for each category (depending on the budgeting method you have chosen).
After you split your income between your needs, wants, savings, investments, debt repayments, etc., you can look at your money for the month and control it better.
Some people use the envelope system to divide cash for spending into separate envelopes for different spending categories. When the envelope has no money, you know you can't spend any more in that particular category.
10 – Keep Track Of Your Budget
I like to keep track of my money daily. Some people prefer to do it weekly, but it seems more tedious if you have seven days to check at once than one each night. So I go to my Excel spreadsheet and minus the expenses in the categories I have spent money. This way, I know how much money I can still spend on that category for the rest of the month.
You must keep an eye on how much money you have spent and whether you have overspent. For example, it's no point to set you can only spend $100 on eating out monthly, but you keep spending $300.
Keep remembering your financial goals every time you think about spending money you shouldn't. You should keep your expenses equal to or lower than your monthly income. Otherwise, you will be in debt.
11 – Evaluate Your Budget Monthly
After one month of implementing your budget, you can check what went right and wrong. It's fundamental that you make some adjustments and keep trying till you get it right.
You may have to change to a different budgeting method, spend less money in one category, or decide what to do with the extra money left in your bank account. You mustn't give up and keep working towards your financial goals.
12 – Readjust Your Budget If Necessary
I had failed many times when I started budgeting my money and only got it right after many trials and error attempts. The same will happen to you, so keep evaluating your budget monthly till you find the right way to achieve what you want. It becomes easier over time to make adjustments since you have a better baseline budget and a better understanding of how you spend money.
Keep in mind that life changes from time to time, so you also have to adapt and make changes to your budget to ensure you accomplish what you have proposed. Your financial goals may also change, and that reflects on your budget.
13 – Try Budgeting Again
Now that you have modified your budget, it's time to try it again and see if they work better or worse. Don't forget to keep modifying your budget until you find a better way.
How To Start A Budget Plan?
To start a budget plan, you now know that you need to decide why you want a budget, collect all the financial records you need, add up all your income and expenses, determine your financial goals, understand different budgeting methods, and pick one. Then, you use the correct budget tools, implement the desired budgeting method, hold track of the budget, evaluate it, readjust it, and try it again.
Let me give you some examples of budgeting for a house, saving money, or budgeting during college.
How To Start Budgeting For A House?
If you want to start budgeting to buy a house, these are the steps:
- Determine how much you can afford to spend on a home
- Check your credit score
- Check the mortgage rates
- Check any home-related costs
- Talk to your bank about how much they can lend you
- Choose the house you want to buy (or know what you want)
- Figure out how much to save for your down payment and all other costs (closing costs, moving expenses, insurance)
- How much money can you save every month
- For how long do you need to keep saving that money
- Pick a budgeting method and start saving to buy your house.
How To Start Budgeting And Save Money?
If you want to start budgeting to save money, these are the steps:
- Decide why you want to save money
- Determine how much money you can save monthly
- Decide for how long you will save money
- Check your expenses
- Find ways to cut expenses
- Make savings automatic
- Achieve your saving goal without touching that money for other things
How To Start Budgeting In College?
If you want to start budgeting during college, these are the steps:
- Check your financial situation
- Anticipate and make a list of your expenses
- Calculate how much money you can spend every month
- Organize your expenses into fixed and variable categories
- Track your expenses for the last month
- Cut costs where you can
- Set financial goals
- Speak with a colleague and budget together
Biggest Budgeting Mistakes
When someone starts budgeting, it's because they want to accomplish a particular goal. However, everyone makes some mistakes when at the initial start of the process. These are the most common budgeting mistakes:
- Unrealistic Expectations (You make a budget that is impossible to stick to.)
- Forget About Income Tax (You consider your gross income and don't minus taxes and deductions.)
- Your Budget Is Too Extreme (You don't live place for fun and end up giving up budgeting because it's too complicated.)
- You Don't Make Adjustments To Your Budget Overtime (You did your budget once and decided to keep it like that every month. What worked a few months ago may not work now since life keeps changing.)
- Making Uninformed Guesses (You make a budget based on guessing your expenses, not checking in detail how much you spend)
- You Don't Consider Semi-Regular Expenses (You don't consider yearly charges and events that happen once per year)
Common Questions About How To Start Budgeting
These are the most common questions on how to start budgeting.
How Do You Start A Budget For A Beginner?
To start a budget as a beginner, you need to understand that it's a try-and-error process until you find the most suitable budget method and what works best. You need to check your income, all your expenses, where you can make cuts, and why you want to budget. Follow the steps I have provided above and start budgeting today.
How Do I Start A Budget With No Money?
If you want to start budgeting with no money, you need first to check how much income you earn every month, check all your expenses, and make some cuts. Then, with that money, you can start paying debt, creating an emergency fund, or saving the money for a goal you have.
How Do You Plan A Budget?
To plan a budget, you need to gather all the available financial information, from your net income to every single expense. Then, after you do a deep analysis and according to your financial goals, you choose the best budgeting method for your needs and split the money between the categories you have.
What Are The 4 Simple Rules For Budgeting?
The four simple rules of budgeting are to determine why you want to budget in the first place, set realistic financial goals, pick and try different budgeting methods, and keep evaluating and readjusting when needed.
Conclusion On How To Start Budgeting
If you are looking for an answer to how to start your first budget, you don't need to look anymore. Follow the steps above and figure out what is best for your needs since budgeting is different for everyone, but the steps never change.
At the end of the day, never forget that you will fail to budget plenty of times, especially the first ones. So don't be too hard on yourself, and keep trying. The most important when starting budgeting it's not to give up.
Michael launched Wealth of Geeks to make personal finance fun. He has worked in personal finance for over 20 years, helping families reduce taxes, increase their income, and save for retirement. Michael is passionate about personal finance, side hustles, and all things geeky.