Budgeting for Beginners

Making a budget can seem intimidating at first, even though it is very important to have one. You may find yourself financially treading water at the moment, or even worse, and really feel the need to make a budget, but you’re not sure where to begin. What do I include? Where should I make and keep the budget? Pen and paper? In a spreadsheet on a computer?

Why Budgeting is Important

Why is budgeting important? Without a budget, you don’t have a plan for your money. Even if you have a large amount saved, you still need a plan for your money and you can find yourself in financial peril quicker than you think. If you’re living paycheck to paycheck, you’re even closer to disaster. If you’re in either scenario or somewhere in between, the best time to start budgeting is now!

Paper or Digital Budget?

When it comes to how to make the budget and where to keep it, it depends on your personal preference and what makes it easier for you to create, manage, and store the budget. If you find that using a computer or app would cause to you lack discipline, or if you are not exactly tech-savvy, then pen and paper would be the better option. On the other hand, if you prefer to avoid paper clutter, save trees, and have the skillset to use an app or computer programs like Excel, then a digital budget would be the way to go. There are pros and cons to each. It all comes down to your preference.

Calculate income

Once you’ve decided how you are going to create your budget and where you will keep it, you then need to start with calculating your income. This will be easier to calculate, especially if you only have one job and no other sources of income. If you have a second job, a side hustle, or other sources of income such as child support, you would include these as well. If you are budgeting with a partner, you would include their income also. If any of your income sources vary on occasion, try going with an average or the lowest amount in your budget.

Calculate Expenses (fixed/variable; monthly/quarterly/annually, etc)

Calculating expenses can be tricky since not all amounts are the same each month, and not all expenses have monthly payments. Fixed expenses, such as rent/mortgage, car payments, and cable/internet, will have the same amount each month. For variable expenses, such as groceries and utilities, try using an average of the last three months. For expenses that aren’t monthly, such as various insurances and memberships, convert them to monthly rates to include them in your budget (example – if you pay $600 every 6 months for car insurance, you would budget $100 per month).

Subtract Expenses from Income

Once you have calculated both your monthly income and expenses, the next step is to subtract your expenses from your income. If you get a positive number means that you have money left over once you have made your payments. A negative number means that you are spending more than you make.

What to do Next (based on if you have a + or – result)

If you have a positive or negative number as a result is key to what your next steps should be. A positive number is ideal and will make your life easier than a negative number. A negative number isn’t the end of the world, but you will have a lot more work ahead of you.

What to do with a Positive Number

If you have a positive number and money left over, there are multiple paths you can take depending on what goals you have. If you have multiple loans, this extra money can go towards extra payments or larger payments to pay off these loans quicker. You can also set this extra money aside for future expenses, regardless if they are anticipated or emergency expenses.

What to do with a Negative Number

The first path you can take is to cut your expenses. When cutting expenses, the first place to start is with items that are not essential to your daily life. Items that relate to entertainment, eating out, and recreational travel. While groceries are essential to daily life, you may want to look at what you purchase on a regular basis, and look for cheaper alternatives or remove them from your grocery list. Another path to take would be to increase your income. This can include pursuing a raise at your job. Other options are taking a second job or starting a side hustle, if you don’t already have one.

Summary

Now that you have a budget together, you have taken that important first step to improving your finances or keeping your finances in good shape. Improving and maintaining your financial health is an ongoing process, and can be very difficult at times. It is certainly not an impossible process, however, and having a budget to continually monitor and track your finances will go a long way in you being able to do this. YOU CAN DO IT!!!