A Beginner’s Guide to Budgeting

Budgeting is probably one of the most basic foundational elements of financial planning. Anyone can make a budget. All it requires is a little bit of planning, tracking, and most importantly, self-control. While anyone is capable of creating a budget, not everyone can stick to it. 

If you’re someone that’s struggled to stick to a budget in the past, we encourage you not to lose hope. Maybe you feel that your inability to stick to a budget is due to not having enough income, or even having too much debt. Instead, perhaps the reason lies in your approach.

To successfully create your budget, you should know why you want to create one in the first place. Sure, one of your goals is probably to save money in general on everyday expenses, but think deeper than that. Want to start an emergency fund or boost your retirement savings? Or save for your child’s college fund? Maybe you want to live more freely and be able to travel more often. A budget is a good place to start to ensure that you’re maximizing your savings.

Once you set your goals, it’s important to maintain flexibility with your budget to ensure that it remains dynamic as your financial goals may change throughout time. However, that’s not to say that changing your goals is the solution to your budgeting failures.

Next, after reflecting on your wants and needs for why to create a budget, you’ll need to reflect on your current spending habits and income. 

Start with your income. That’s typically the easiest element to calculate. Look back at your after-tax income on your pay stub(s) or on your bank account history and track your monthly average.  Include any income that you generate, whether that’s from your day job or your sales on Facebook Marketplace. If you are a business owner and your income fluctuates, you may want to use a yearly average.

Tip: If you receive bonuses or commissions that aren’t a part of your regular income, don’t include that in the calculation. Get into the mindset that any additional or unexpected large sums that come in outside of what you’ve accounted for should be immediately put away. For example, maybe your boss decided to give everyone in your department a $1,000 bonus at the end of the year for good performance. You should plan to allocate that money toward your savings or invest it instead of using it as an excuse to splurge. Otherwise, you’ll spend it all before you realize it, and you don’t want your budget to depend on this income if it’s irregular.

After calculating your income, take a look at your spending. Look at your bank account history and make note of everything. It’s a good habit to adopt, as looking back at your purchase history frequently can help you identify any surprise charges you may get on your card and take action immediately.

Again, you’ll probably want to calculate your weekly or monthly average using a few months’ worth of data. If you typically pay with cash, look back at your old receipts. 

You may choose to track your spending in a spreadsheet, in an app, or by hand. Do what works for you, but select the method that you’re most likely to follow through with. If you’re like most of us and spend a lot of time on your phone, you may want to download an app such as Mint or Qube Money so that all the information is in one place.

You may find it helpful to categorize your spending based on what you’re spending the money on – such as rent, utilities, groceries, or your car payment – or based on what type of expense it is – fixed or variable, necessary or unnecessary. This can help you understand where exactly your money is going each month and identify opportunities to make adjustments.

Your fixed expenses are fixed for a reason, and if they’re needs or necessary expenses, you should budget for those first. According to the 50/30/20 rule, you should allocate half (50%) of your budget for needs, 30% for wants, and 20% for savings and paying off your debt. Whether or not you decide to use this rule, start with the needs category, then work your way down. 

Just like with any good approach to reducing clutter in your home, the first step is to go through what you have and to purge – eliminate what you don’t need. Once you realize how much money you’re spending on your gym membership or streaming service subscriptions, you may find that they’re not worth what you’re paying for how much you’re using them. Start with eliminating the things you know you won’t miss, then revisit these expenses every so often to gradually reduce. Quitting cold turkey isn’t for everyone, and being unrealistic with yourself and your spending habits only increases the chances that you won’t stick to your budget.

For other variable expenses, you may not be able to cut them out completely, but you may be able to find ways to optimize what you’re paying. For example, if you might change your strategy when it comes to buying groceries to buy in bulk or only buy certain items when they’re on sale. You don’t need to become an extreme couponer, but maybe you’ll want to keep an eye out for sales and put a little more effort into planning your grocery store visits.

After subtracting your necessary expenses from your income, next comes the difficult part. Here, methods can vary based on how you completed the previous steps. If you’re going by the 50/30/20 rule or any other percentage-based rule, this part may be a breeze, but that’s not to say it’s the best way to budget.

Say the goal that you identified in step one was to pay off your car loan. In this case, your budget towards car payments might be a little higher than it would be with the 50/30/20 rule. This is why it’s important to prioritize and set goals beforehand.

When it comes to the more complicated calculations and long-term planning, it’s always best to talk to a financial professional. Our advisors use comprehensive technology and an integrated planning approach to help you reach your goals. 

As with many changes of habit, your budgeting skills may take some time to improve and develop. Eventually, you’ll become better at saying “no” to unnecessary things, and your ability to prioritize will become more like second nature.

Plan for the unexpected. If you don’t already have a strong emergency fund, this should be your first priority before working towards other savings goals. Unexpected expenses are bound to come up, and you don’t want to have to put yourself deeper in debt every time you encounter an unexpected expense. Aim to save at least three months’ worth of your typical monthly expenses to cover yourself in case of an emergency so that you don’t have to take out a loan or dip into your retirement savings.

If you plan to put away or utilize every last cent of your income, you’re bound to cave in a way that can cause you major setbacks. Leave yourself a little of what’s left over each month to spend on whatever you want to spend it on. Knowing you have some freedom within your budget’s limits will help you stick to it.

Again, starting out with too many restrictions is an unsustainable approach to budgeting. Start out with the obvious – eliminate expenses you know you’ll have no trouble cutting back on – then work to continuously improve.