Unless you are a complete newbie to the world of personal finance, I’m sure you’ve heard a thing or two about budgets.
Everyone raves about how awesome they are so much that you start to imagine confetti exploding when you hear the word. I’ll admit, they’re pretty handy.
Without a budget, my finances would be (once again) in turmoil. If you feel like your bank account is up in flames then you’ve landed on the right post because this is all about budgeting for beginners!
Why a budget is important
A budget holds you accountable for every dollar earned and spent. It gives you the authority to tell your money exactly what it needs to do versus your money telling you what you can (better yet, can’t) do.
If you want to treat yo’ self you’ll know just how much spending money you have to do it.
Budgeting for beginners steps
Step 1) Determine your monthly income
To get started, calculate how much income you are bringing to the table each month. You don’t have to have the exact amount right down to the pennies, but it needs to be pretty close.
For your working wages, gather your pay stubs to determine your net pay. If your pay fluctuates, calculate the median amount.
For example, if your paychecks range from $800 at the lowest and $880 at the highest, add the two together and divide by two ( the number of paychecks). Your monthly income should be written down at around $840.
Be sure to include all consistent sources of income including child support payments, social security, second jobs/side hustles, etc.
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Step 2) Deduct all essential expenses
Use the word ‘essential’ at your discretion. These expenses should include your rent/mortgage, car payments, water bill, groceries, etc. Basically, anything that’s keeping you alive and well. Include all debt payments in this step as well.
Sort through all of these expenses and calculate the total.
For those that fluctuate, such as an electric bill, be sure to leave enough room just in case the amount is higher than normal. So, if your electric bill is normally around $80 then budget around $110 to make room for those uh-oh months.
Since you’re a budgeting beginner, this step may require you to gather the last 2-3 bank statements to determine how much you should safely put aside.
Step 3) Deduct the amount you want to save
Now that you’ve deducted your essential expenses from your income it’s time to save!
The famous money-man himself, Dave Ramsey, stresses the importance of having at least $1000 put back into a beginner emergency fund.
What is an emergency fund?
An emergency fund is exactly that…a fund for emergencies and emergencies only.
Needing a fancy pair of eyeglasses may be a fashion emergency, but it doesn’t qualify for a withdrawal. However, when Ol’ Faithful needs a new battery that money is there to cover it.
If you already have an amount saved for the unknown, consider challenging yourself to meet a savings goal.
Personally, I like to have money saved outside of my emergency fund just because, ya know, it’s the “adult” thing to do. If you’re not saving money yet, I suggest you read my post for saving beginners!
Step 4) Deduct non-essential expenses
A non-essential expense is something that we pay for regularly but is not exactly needed. This includes cable, cell phones, club fees, subscriptions, etc.
Include them in your budget and determine if your spendable income (the amount left over after expenses have been deducted from your income) is at a comfortable balance.
In this step, you may find that you need to cut and reduce your non-essential expenses to free up extra money.
Step 5) Set aside play money
Lastly, set aside an amount for entertainment. This includes your hair appointments, a little shopping, and all that jazz.
This step should be done after all expenses and savings have been deducted from your income. This way, you know how much money you have in excess that can be used for some fun!
Now, it’s easy to get carried away on entertainment so I opt to use the zero-dollar method. This means that every dollar has an assigned job so your remaining balance is $0.
Let’s say you have $20 remaining after you’ve gone through all of the steps. Following the zero-dollar method, you will go back and add to your budget categories until you’re at $0. Simple as that!
So many of us are led by our money, but a budget puts you back in control of your finances. Budgeting for beginners doesn’t have to be difficult, and as an added bonus, I’ve created a budget sheet to help get you started. Grab it here!