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Creating a budget as a beginner can seem like a daunting first step, but I promise that it is absolutely necessary. Budgets force us to be intentional with our spending and overall financial situation.
It doesn’t matter if you make a little money or a lot of money. It also doesn’t matter what your specific expenses are honestly. A budget is a guide on how to handle your finances. You need it, trust me.
A lot of people associate having a budget with a negative thing and that is the furthest thing from the truth. Budgets keep our finances organized so we can better achieve our financial goals. Whether you are trying to save money, pay off debt, or simply better manage your money, everyone needs a budget.
A budget is necessary for a couple reasons:
- It forces you to plan for expenses and gives you a sense of control of your financial position.
- You can easily identify what doesn’t work for your budget and how it can negatively impact your financial goals
- You need it if you’re trying to achieve any level of financial freedom (doesn’t that have a ring to it?!)
Also, establishing a budget is really all about intentional living. Instead of being reactive to what life throws your way, wouldn’t it be great to be proactive with your finances? This means making meaningful decisions about your money and how you will handle it.
Related Post: How to Create S.M.A.R.T. Goals To Achieve Success
So I’m going to show you 5 steps for how you can create a budget to achieve your financial goals, no matter what they are!
Before you can get started with your budget, you should be completely clear on your income. For the purpose for this budget, think of your monthly income.
Calculate Your Monthly Income
Income is subjective so this will vary by person. Income be defined as money you receive from your job, side hustles, etc. Calculate the total amount of money you receive every month.
Here is a good time to also figure out if this number is dependable. What i mean is that, some people are salaried so their pay check does not every vary. They receive the same pay each time.
This may be different than someone who works hourly who can expect slight differences in their pay checks. Or even a freelancer who isn’t sure exactly when they will get paid, just that they will.
It really doesn’t matter how often you’re get paid, but it’s the first step because you should be comfortable with your income, where it’s coming from, and when you’ll receive it. The thing to always keep in mind is…
Do what makes sense for you and your household!
Now that you have calculated your income, make sure that you are NOT looking at your gross income. You want to include only the income you receive after taxes, insurance, retirement, etc. This is what is known as net income.
In other words, this is referred to as your take-home pay. This is the number you will deduct your expenses from!
Identifying Your Fixed Expenses
Now that we got your income, let’s move on to the lesser fun part; bills. Okay so not fun at all, but again, very necessary!
Your fixed expenses are what you can reasonably expect to pay each month for a certain obligation. This may include rent or mortgage payments, car payment, car insurance, etc. This is a fixed expense because it doesn’t change frequency or amount.
To make it easier, grab a piece of paper and list your fixed expenses while you reflect. Some expenses you may be able to adjust (e.g., car insurance payment by paying in full instead of monthly) but others are there no matter what (e.g., rent or mortgage).
One fixed expense that I cut over the last few years was paying for cable. It was a fixed amount being debited from my account on the same day every month.
After some serious reflecting, I opted to cancel cable altogether. And honestly, with platforms such as Netflix, Hulu and even Disney Plus, it’s safe to say that cable doesn’t have to be a fixed expense for most households. I still have a bill, but it’s way cheaper than the expensive cable package I had.
Now that doesn’t mean YOU have to cancel your cable. But the picture I want to paint is to be mindful of what you are making a fixed expense. Ask yourself, “do I need this, or can I find a way to cut down this expense?” And before you know it, you’ll be thinking like someone who has a budget.
Lastly, I want to point out that even with Netflix or Hulu, there are fixed costs associated with these subscriptions. Make sure you don’t forget these when you’re calculating ALL of your fixed expenses!
Identifying your Variable Expenses
These are different than your fixed expenses. Variable expenses are expenses that can change from month to month. Examples include electricity, water or gas, dining with friends, going to the movies, etc. Basically, an expense that can change for any number of reasons.
And don’t be too hard on yourself here, we all have variable expenses, and they are not “bad” to have. The point is to be aware and mindful of what they are so you can learn if they are needed in your budget or if you need to make some lifestyle changes to save your coins.
In my last apartment, our electricity was a variable expense (had two roommates). Each month the amount was different, sometimes the due date was different, and it was hard to budget for, honestly.
While I could not fully anticipate how much I would be paying, especially in those hot summer months where we constantly blasted the AC, I was mindful of the costs and created a buffer in my budget so that it would fall within a range.
This didn’t stop me from spending money, it just gave me peace of mind that I was better prepared to handle the little things that arise when it comes to finance.
So try to be mindful of where your money is going each month. Ask yourself if there fixed or variable expenses you can cut down or cut out completely. The more honest you are with yourself about your finances, the better off you’ll be.
How to Track Income Against Your Expenses
Now that you have calculated your monthly income, fixed expenses and variable expenses, you need to implement a system to hold yourself accountable.
This is really important so you don’t overspend AND blow your financial goals before you get your feet wet.
Boy, I sure do hate when my funds are lower than I expected because I spent money in areas I didn’t realize or because I missed something when creating my budget.
I recommend using the app EveryDollar. It’s a FREE (can use their website or download the app for both iOS and Android users) tool that allows you to create a monthly budget to track your income, expenses and spending habits! You can also easily rollover one month’s budget to the next month without having to start from scratch. Sounds nice right?
First, you will log your income. Feel free to put in one entry for the TOTAL amount you expect to receive or split it into two. I like to keep things organized so I always have two line items for the two pay checks I’ll receive. The total is still the same, just a quirky thing I like to do.
Second, you will then go in and establish your expenses. They have some pre-set categories such as rent and groceries, but you can edit it as you see fit.
Also, one of the cool things about EveryDollar is that it reminds you if you have not budgeted all of your indicated income.
Let’s say that you plan to make $1,000 next month, but all of your listed expenses only account for $700. The app will tell you that you have $300 left to budget, which is nice. It helps you literally track each dollar which is the point of having a budget!
Once your income and expenses are established, your budget is created. Now it’s all about following it and sticking to it. “How do i do this?”
Throughout the month, the app allows you to record your transactions or where you’re spending money on.
Let’s say you’ve added rent as one of your expenses but it’s not due right away. When it is time to pay, you can log the expense or transaction into the EveryDollar app.
This will deduct the transaction from what you budgeted or allocated for that expense (in this case, rent), so you know there is nothing remaining. Let’s use the same example for your car gas. If you plan to spend $100 on gas in a month but fill up once and only spend $30. It will show that you have $70 remaining in your gas budget.
I will say sometimes it can be hard to remember to track EACH time you spend money but that’s the biggest lesson I’ve learned with the app. How to be mindful with your spending habits and tracking how it impacts the rest of your money. That my friends makes it definitely worth it!
(Also, I am not an affiliate of EveryDollar. I just love their app and enjoy how it’s helped me work towards my own financial goals!)
How to Actually Stick to Your Budget
By now, you have identified your income for the month, fixed and variable expenses and have found a tool to help you stay on track. “Is it really that simple?”
Honestly, I wish it was. But the reality is we are human and it can just be really hard to stick to a budget. Things come up, goals change…I get it because it’s happened to me a few times more than I’d like to admit.
The most important part of any budget is your habits that go with your budget. How you look at finance as a whole is really important to not only sticking with your budget, but achieving your financial goals.
You can create a budget every month. But if you have terrible spending habits, you will continuously blow your budget and be further away from achieving your financial goals. That’s a no go!
So here are some things I’ve picked up over the years to help you STAY on budget and achieve your financial goal:
- Do not make large purchases that you haven’t considered for at least TWO months (this gives you time to be sure of the purchase AND its impact on your budget)
- Try to use cash to make purchases so you don’t overspend or rack up any credit card debt (e.g., going to dinner with only $30 cash so you know you can’t spend more than that exact amount)
- Introduce minimalism to your budget. Ask yourself, “do I need this now or can it wait?” Usually I find when I ask myself this, I don’t need the item at all.
- Eat most of your meals at home. (my mom used to tell me that we had food at home. I’m guessing you do too!)
- Remain steadfast in saying NO anything that doesn’t fit your budget. (FOMO is a drag, I know, but so is ruining your budget or not hitting your financial goal)
While this isn’t an exhaustive list, it can help you transform your mindset ab out money and budgets. I’ve seen people budget their ways into being broke and I’ve seen some budget their way into financial freedom. Budgets are a tool to help you achieve whatever financial goal you have.
But what makes a good budget work, is the habits that go with it. Don’t be afraid to get really honest with yourself about your financial picture and how you want to improve it. Budgeting is one of the best things any adult can do, and honestly, it’s the thing we all should do.