Budgeting 101: How to Budget Money (10 Steps)

budgeting 101

We hear it all the time, we need to be better with our money. But, this is not the easiest thing with the economy as it is. For a huge chunk of the population, the cost of living is rising and wages are not.

So, how is it possible to make better financial choices, when it is already so hard?  The truth is, budgeting is the way forward. Financial advisors are always talking about it, investors talk about it.

However, the concept can seem scary to a newbie, it comes across as a financial plan that leaves no room for fun.  This is not true though, a budget is whatever you need it to be, tailored to your spending, your income, and your expenses. 

How? This is what we are here to tell you. We are here to introduce you to how a budget can change your life.

10 Steps to Budgeting Your Money

Budgeting Basics

So, what are the basics? Well, a budget is basically just a roadmap, dictating where your money goes, so that you can better ensure your income works for you.

We want our money working for us more.  A budget will assign each bit of money a role, and limits are established for specific expenses. 

Making up a personal budget will be absolutely imperative in helping you to develop better spending habits. It can also help you in saving, and setting money aside for the future, helping to ensure that the money you have, goes where it should be in order to benefit you the best. 

You do not need to restrict yourself excessively, and you can organize it by month too, we all know that months with many birthdays, or Christmas shopping can be hard to budget for.

Budgeting per month allows you to have better management over your money, even in these times.  So, how do you start making up your initial budget?

It might seem intimidating at first, but we are here to help you through every stage of setting it up, from planning it out to going back and looking at the progress.

Look Into Current Spending Habits

current spending habits

The first thing you need to do when creating a budget is to look into how you are currently spending your money. This means looking at areas where you may be overspending, areas where you may be making frivolous purchases, and so on. 

You need to look at your income, and your expenses, and note where improvements could be made. Are you spending too much on your utilities?

What dominates your expenses?  Look at your spending and ask the hard questions. 

Use an app

In order to see where your spending is going overboard, or where you need to make improvements, apps are a good place to start. 

There are some fantastic budgeting apps out there, but even if you just have a banking app, this will show you your outgoing vs incoming money, and some banking apps can even show you how much has come out of your account versus gone into your account per month. 

Seeing something like this, as a physical representation of your finances can be a big wake-up call for some, showing when you are spending more than you are making. 

However, banking apps are not the only good apps. Having budgeting apps can also be helpful. There are some automated budgeting apps, in which you can automate them to track your spending and find areas in which you are overspending. 

You can find apps like these everywhere, but make sure you read reviews and talk to your bank about using them before you download them.

Use your statements

If you are not the kind of person who likes using apps or online banking to track their spending, your alternative is to use your statements.

We recommend using 3 months worth of bank statements to get a full picture of your spending habits.  One month may not be enough to give a wide enough view of your spending, however, 3 months should do. 

Go through each statement, and note down your expenses per month in relation to your income. This should show you if you are spending more than you earn, or if you are getting dangerously close to this. 

Using your bank statements may not be as efficient as using an app or online banking, but it is still a valid way of looking over your spending habits. 

As you look over spending habits, consider the expenses that were not necessary, or that were extremely large. These will be significant areas to look into later.

Enter your expenses into a spreadsheet or notebook

As you go through your online banking, apps, or bank statements, you want to make a note of your expenses, even if it was just pennies. Everything adds up, so make sure that you note down EVERYTHING

It is good to note at the top of your spreadsheet or notebook what your income was for that month as well. This will help you to calculate whether or not you went over what your monthly income was, if you were close to going over, or if you made any savings from that month. 

It is ideal to note these down in a table format for a clear perspective on how you are spending.  An alternative way to work is that while you are working out your budget and your spending.

Make note of any purchases you make into a spreadsheet or notebook. It is a more hands-on way of looking at how you budget, but it is a good way of doing it in ‘real-time’. 

Add Up All of Your Income

add up all your income

As you budget, you have to remember that it is not all about your expenses, it is about your income as well. You need to make the most of your income, so knowing how much you have incoming is just as important as knowing how much you have going out. 

You should factor for every source too. This includes: your typical wage income, any business income, income from any side jobs or additional work, any income from investing you have made and also any child support or alimony. 

If you have a variable income, perhaps if you work freelance, a primary favorite budgeting form to do is to pay yourself a salary. Meaning you will decide on a ‘salary’ on a per-month basis to base how you will budget yourself, and then any extra comes in, you will have some savings for a rainy day when finances are lower.

Subtract Taxes and Other Deductions

taxes and deductions

In order to get the most accurate picture of how your income/take-home pay will look, you will need to deduct any taxes and any additional deductions from the gross number that represents your income. 

This includes things such as federal taxes, state taxes, social security, and medicare and so on.  If you need to find out your liability for federal tax then refer to your gross income calculated prior, and then compare this to your federal income tax rates.

Find out the percentage of your income you will pay to federal income tax. When you find this, divide it by 12, and you can estimate your monthly tax from this. 

If you need to calculate your state income tax, note this is basically just like your federal tax liability, you need to refer to your state's income tax. 

Social security and medicare are at 6.2% for social security and 1.45% for medicare for FICA

Identify Your Financial Goals

identify financial goals

A majority of people who decide to create a budget will make one because they have hit a roadblock, and they would like to start being able to do more with their wealth.

This usually encompasses long-term financial goals. Some of these goals include, but are not limited to: 

  • Retirement saving. 
  • Buying a home. 
  • Pay off debts.
  • Accumulate emergency funds. 
  • Save for college.
  • Purchase a new car.
  • Save for a vacation

As you design your budget you want to align what goals you have with these goals, let’s look more into this.

E.G. saving for retirement

If you want to save up for retirement, you will need to make some long term calculations. This means you need to consider how much you will need to sustain yourself from the age you wish to retire. 

Sadly, this does include considering inflation rates, based on current trends. You may want to consider a potential inflation rate of up to 2.55% or higher. 

If you wanted to retire at 60 years old, you would want to consider living to 100 as a benchmark. Consider how much you would need to sustain yourself happily for 40 years, considering things like medical expenses, rent, utilities, and so on. 

You may also want to have a 10% contingency, in the case of a financial recession, any emergencies, and so on.  It is wise to do this to ensure your stability.

As you look to budget for this, consider how much per month you will need to save to meet your goals, and also consider the best way to save, some bank accounts may have savings accounts with interest rates that are ideal for long term saving like this. 

Paying off debt

If you are considering saving as a way to pay off debts, you will need to look at ALL your debts. While most of us only want to ever have one debt holding us back at any one time, some will have more. 

When faced with this, it is best to first look at consolidating your debts before you budget, so you only need to budget to pay off one large debt and interest at one time, instead of multiple debts and varying interest rates. 

As you calculate how much money you need to be able to pay off your debts, consider if your debtor has an early repayment charge (some do).

Look over your paperwork, is your interest rate fixed? Or is it variable?  If your main goal for budgeting is to pay off debts you may want to consider a budget plan such as the 50/30/20.

Saving for college

When budgeting to save for college, you will have to consider your overall expenses. College expenses are not so black and white. You will need to cover the cost of the course, but also accommodation, and also the expenses for studying material. 

If this is the reason, you want to look over some rates and costs for colleges and their accommodation, as these are the two biggest expenses students face. 

The average cost per year in the United States for a public two-year college for tuition and other fees as well as room and board is $12,320, so you would be looking at $24,640 for the full two years. 

For a private college in the United States, in attendance for 4-years, the cost per year for tuition is $35,830, and $12,680 for room and board, making it $48,510 per year.

This means for all four years you would be looking at $194,040.  Whichever you choose is up to you, but remember to be realistic about how much you can spend, and if you have any alternatives, perhaps if you live near a college, you could save on the room and board. 

Buying a house

Perhaps you want to buy a house. Renting is a tough market and uses up way much more money than buying a house. For this reason, most people want to buy, however, the property market is savage. 

You want to look at the average cost of a home like the one you would want, in the area of your choice. Then, look at the average mortgage. Do not forget to consider your credit score as you consider this. 

Consider the mortgage you could get with your current credit score, and how much you would be able to put down as a down payment and afford on a monthly basis (with an interest rate relative to your current credit score). 

Using this information you should be able to get a good calculation on how much you will need to save.

Long term and short term goals

When you make your goals, consider short term and long term goals. Set up your budget around meeting these goals. Decide on how much will be needed in order to achieve each of your goals. 

Doing this has been reviewed in multiple studies to raise the motivation around saving, and budgeting, and has a higher achievement rate. 

In order to achieve your goals, you need to be specific, and do your research and set deadlines for these goals. 

Consider your long term and short term goals, you could want to set aside $100,000 to buy a house as a long term goal, but also save $5,000 for a vacation as a short term goal. 

Having both is ideal, as being able to achieve your short term goals can work as further motivation to achieve your long term goals.

Decide How Much to Save and Set Goals 

start saving money

Once you have set your goals and know what you want to achieve financially, you will need to decide what you have to save to meet each goal, and reach fruition. 

So, if you wanted to save up $100,000 as a down payment on a house within 5 years. Then you would need to save up $1,666 per month. If you wanted to set up an emergency fund that would have $1,000 within the year, you would want to save a minimum of $83.33 per month. 

Say you had $5,000 in debt, and you wanted to pay this off in a year, plus a 10% interest rate, then your monthly payments would need to be $440. 

It is quite intimidating to see goals with such large numbers attached, but these are good examples of looking at goals versus monthly payments. If you cannot meet the goals you need, do what you can reasonably, or alter the time period.

Try Using Cash to Keep Spending Under Control

Try using cash

While the use of cards has increased, it is often seen as much better, and easier for transactions. It can be so easy to jump from purchase to purchase in record time without realizing just how much you are actually spending. 

Having easy spending with cards, be they debit or credit cards, does come at a hefty cost. We so easily lose track of how much we spend, it may only be $10 here, $5 there, but over time, it adds up, and can easily end up sending you way over your budget. 

If you find that having your card, and easy spending, even through Google Pay or Apple Pay is making your money fly out of your bank faster than you thought possible, using cash instead might actually be a better option. 

This is the best tactic for daily spending, it can prevent overspending, and helps you keep track of your money better. It might not be as quick, but you get a visual representation of just how much you are actually spending.

Find The Best Savings Resources and Tools

Saving up money can feel like a drag if you do not have any tools other than yourself and your math skills, but if you have the right tools at your disposal then you will be able to save up your money with much greater ease. 

Try using a budgeting app, such as something like Mint. It will help you to track and manage your budget on the go. In fact, it will track your spending automatically, letting you know where your spending flaws are. 

Apps like this will synchronize all your bank accounts, and your credit accounts in one place so that you can actually track your spending and your saving goals easily. 

Choosing the correct place to keep savings is another important factor we often overlook. High-interest accounts can be a good option, especially for something like emergency funds. 

However, if you want something more long term, then an IRA would be better.

Identify Fixed and Variable Expenses

Identify expenses

You also need to be able to pick out how much of your budget goes towards expenses that are fixed and expenses that are variable. Start off by crafting a list of common expenses.

Consider things such as student loans, mortgage, car payments, rent, and so on.  As you have built up a list, craft a monthly estimate for each, this helps you know what percentage of your income is dedicated to this expense.

If you are not sure how much it takes up, look at your bills.  Then consider variable expenses. This includes things such as: groceries, utilities, dating, gas, entertainment, dining out/ getting take out, clothes, ride-shares. 

You need to account for your variable expenses on your monthly budget, even if they vary, try to find an average. It will rarely be consistent, so try to get a vague estimate on how much you average on your variable expenses per month. 

Then you can set limits for each of these categories in your budget.

Decide on Type of Budget

decide on type of budget

Once you have got an idea of your budget you will need to actually create the budget.  You will have set yourself goals, outlined deadlines for you to meet your goals, and how much each goal is.

You will also have looked at where your expenses are, any flaws in your current financial situation, perhaps some overspending.

Now it is time for you to look over all of this and get an idea of how you will budget. There is no one budget style, there are many, but we will walk you through two of the primary budget options for you. 

A Zero-Based Budget

Dave Ramsey made the 0-based budget popular. This is a budget that involves making your income minus an outflow of $0. With this kind of budget, every single dollar to your name will be given a job, with only some of your cash ending up in savings. 

The rest of your money will end up being assigned into each different spending category.  The biggest downside of a budget like this is just how restrictive it can be.

This is typically what people think of when they hear the word ‘budget’ and recoil a bit, believing that it always means you have no ‘play’ money. 

This type of budget is not all bad though. It is an ideal budget plan for chronic over spenders, and for those who struggle to stick to more relaxed budgets. 

It helps if you have a lot of debt payments to make, and many goals to reach.  If you are in a financially tight spot you could start off using a 0-based budget and then move on to another more relaxed budget type when you are out of debt, or feel used to working with a budget. 

In general, it can be a good starting place.

50-30-20 Budget

Sen. Elizabeth Warren helped to create the 50-30-20 budget. With this approach the 50% chunk of income will be put towards your needs, this means rent, food and such, which are vital to live, as well as minimal payments on debts. 

The 30% will also be set aside for your wants, this means entertainment, trips, and maybe additional things such as clothing, or maybe a meal out. 

Then the 20% goes towards saving.  With this kind of approach you have more of a flexible approach to budgeting, but you may still overspend in some regions. 

Another version of this, would be the version that is more specific towards those in debt in which the 30% is dedicated to paying off debts, which would be a version of this budget plan more ideal for those who want more financial freedom through ridding themselves of debt first.

One way to prevent overspending in a budget type such as this is through the use of automation. Automating your savings, and many of your payments can prevent you from over spending, and accidentally financially damaging yourself. 

Track Your Progress

track your progress

Creating a budget is a great step into becoming more financially stable, and financially free. It will help you to ensure all of your expenses are covered, and you will be better able to reach exciting and life changing milestones such as college, buying a home, or paying off student loans. 

As you keep on budgeting, ensure that you make adjustments as you go along to ensure that your budget is always tailored to your situation.

Income, lifestyle, and expenses might change along the road, and it is important that you ensure your budget is tailored to this. 

You should also schedule a time to review your budget, be it weekly, monthly, or quarterly, to make note of any major changes, or if any milestones have occurred. 

This makes sure that you are able to recognize and celebrate successes, but it also helps to encourage you to always look over your budget and rejig your strategy if need be.

Next Steps

These are all the major steps to budgeting. Once you are started on the road to budgeting it gets easier from here. If you keep a bit overwhelmed, do not worry.

Budgeting gets easier once you get to grips with it.  You already have half the tools you need to make a budget, you just need to get working on it now.

If you start budgeting today, you will see changes very quickly, and you may even find that you feel much happier living life on a budget. 

FAQ's

Still want to know more about budgets? That is no problem, they are a challenge for many. Here are some of the most common questions people ask about budgets.

What is the 50/20/30 budget rule?

The 50/20/30 budget rule is to divide up your monthly income, post tax, into three reasonable categories for spending. You will have 50% for your needs such as rent, utilities, groceries and so on. 

30% will be for your wants, and 20% for paying off debts or savings. You can rejig this plan as needed, however, if you keep your expenses balanced out through these three main areas, your money will work for you much easier. 

You can work on what is most important for you. For example the 30% could be for debts and savings instead of the 20% if you are more focused on this.

What is the 70/20/10 budget rule?

The 70/20/10 budget rule is much alike to the 50/30/20 budget rule, however, the big difference here is that a bigger chunk goes towards living expenses. 

This is probably best for people who have a high cost of living but a smaller wage, as the needs will take up a massive 70% chunk of their budget. 

The 29% will then be dedicated for repaying debts and 10% will be put towards savings. Like the 50/30/20 you can rejig this as needed for your personal situation.

How should I budget money on a low income?

When on a low income, budgeting may seem impossible, or insignificant at best. The best thing you can do is ensure you budget in writing, and budget all of your spending.

You should also monitor your cash flow on a weekly basis instead of monthly.  This will help you to better manage your finances and make changes quickly where needed. 

Your financial goals need to be less as well, start small, and build up from there, you want little successes before to help your financial situation improve.

Do not forget to get creative, learn how to do more with less.  Being creative can save you a lot of money.


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