The Ultimate Budgeting Guide for Beginners

Budgeting is a topic that scares many people. To live by a budget is to live in constant fear of going over and to have to monitor your spending so that you can always be on-budget.

Budgeting really is not a scary concept and I am here to show you why.

What is a Budget?

A budget is a plan. When you prepare for a trip somewhere you make a plan and schedule out activities to do to keep you occupied. You worry about not having enough time for all the activities you want to do. When you finally leave, the plan evolves and you have a great time going from activity to activity and exploring the new areas.

You probably didn’t realize it, but creating a schedule is the same as creating a budget. You are just budgeting your time rather than your money

Financial budgets detail how you plan to spend your money. A budget balances your income with your expenses and puts forth a plan for every dollar you have.

Income – Expenses – Debt Repayment – Savings = 0

There are many types of budgets out there (from least to most in-depth):

  • 3-Step Budget
  • Percentage Allocation
  • 0-Sum Budget

These budget types allow you to create a budget that fits your individual needs without feeling too much like work. If it begins to feel like work, it is likely you won’t follow through with it. Budgets are much like diets in that respect. You need to commit to success or it will not work.

Why Budget?

Everybody says you need a budget but rarely do they answer the question why.

Why do you need a budget?

A budget forces you to track your finances.

Simply through the power of tracking your finances, you will begin to improve your financial situation. Too many people live paycheck to paycheck and don’t realize how easy it could be to get out from under it. People making $100,000 and living paycheck to paycheck are just ridiculous. By tracking your finances and following through on a budget you can set yourself up for financial success.

Do you want to work for the man your entire life?

I know I don’t. The way to get out from under the man, to leave behind the money worries that cripple us all, we need to control our spending. To reach financial independence, you need approximately 25 times your annual expenses saved up. The only way to get there is to budget in your savings every month.

Budgets have the unfortunate perception of constraining you. However, they are the path to being free from money worries forever.

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When to Budget

The time to start a budget is now. When starting your first budget you need to decide on the time period that makes the most sense for you. I believe a monthly budget makes the most sense for personal budgets. Let me explain.

Despite your pay schedule, your bills will be monthly, quarterly, biannually, or annually. There is rarely if ever, a bill that is more frequent than once per month, so we should budget on a monthly schedule. Also, if you try a longer time span than a month, then you will likely have a hard time following your progress on a budget. In March of any given year, it is hard to predict your spending for the next 9 months and to know your progress budget-wise. A month-long budget is just the right length to be able to grasp your head around it.

After developing a monthly budget, you can expand it out to the full year (12 months worth of budgets) and use that to help organize your finances throughout the year.

For longer term projections like when you can expect to retire and long-term investment analysis, you can use year long or multi-year budgets. Personally, I maintain a monthly budget projected out for each year, and then I also have a “Road to Retirement” budget that estimates how much money I can save and its future value at retirement.

Where to Budget

There are many tools out there for budgeting. If you are just starting out budgeting, I recommend using a spreadsheet, whether it is Excel, LibreOffice, or Google Spreadsheets. There are many tools out there to help you on your budget journey. Mint has a good monthly budgeting app if you currently have your accounts synced up there.

The key to following through with a budget is motivation. If you are having a hard time committing to a budget, maybe having some “skin in the game” will help motivate you. I paid for a program when I was dieting to track my calorie intake. I used it for 2 years and was able to lose significant weight. Had I not paid for it, I would not have used it. All of this is to recommend You Need A Budget if you are having a hard time motivating yourself to take the next step. For $50 per year, It helps you really get on the path towards a better financial future.

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How to Budget

Now to the meat and potatoes. How do you make a budget? What goes in it, and how much?

To start off, you need to define your income and expense categories. Typical Income categories include:

  • Salary
  • Spouse’s Salary
  • Gifts Received
  • Investment Income
  • Side Income
  • Other/Miscellaneous Income (credit card rewards, etc)

Typical expense categories include:

  • Debt Repayment
  • Savings
  • Housing
  • Utilities
  • Food
  • Auto
  • Insurance
  • Health/Medical
  • Internet (not included in utilities because non-essential)
  • Mobile Phone
  • Personal / Discretionary (shopping, recreation, dining out)

The above list of expense categories is in order of importance to your budget. The essential expenses are listed first and the final Personal category is for your discretionary spending.

Discretionary spending is any spending that is non-essential to daily life. Budgeting for discretionary categories gives you some play money each month to buy the things you would like to buy that you don’t need to buy.

Typical expenses in each expense category are in the table below:

Expense CategoryTypical Expenses
Debt Repaymentauto loan, credit card debt, student loans
Savingsemergency fund, travel savings, investments, retirement
Housingmortgage, rent, property tax, mortgage insurance, home maintenance
Utilitieselectric, water, heat, natural gas
Foodgroceries, (dining out is a personal expense)
Autogas, maintenance, tags, titles
Insurancehealth, auto, home, renters, life
Health/Medicalinsurance co-pays, medicine, bandages, doctor and dentist visits
Internetinternet bill
Mobile Phonephone bills
Personaldining out, clothes, shoes, shopping, all other discretionary spending

Now we have the bare bones of a budget taking shape. The next part of budgeting is to set a limit or goal amount for each category. Obviously, the goal here is for expenses to be less than your income. Savings and Debt Repayment are included in expenses to balance out your budget and bring it to a sum of 0. Every dollar should have a purpose in your budget and should be allocated.


How Much to Budget

The best way to determine how much should be in each category is to track your expenses for a month. If you have never tracked your expense, I recommend checking out Personal Capital and having their awesome platform track all your expenses. Check in there every week, categorize your expenses and watch as your progress unfolds throughout the month. Through tracking your finances you will be able to build a budget around how much you normally spend.

The question of how much should be in each category is very personal. The best way to determine it is to track your expenses and build around your own spending habits.

Going Forward

Now you have a budget. The goal each month is to follow your budget and then to review it at the end of the month. During your monthly review, take the time to truly think through your budget and see if there is anywhere you can shave off some money and move it over to savings.

I challenge you to review one category each month and shave it down. Once it is shaved down as low as possible move to the next category and shave it down.

The process of shaving each category down may take a year or longer, but in the end, you will be amazed at the progress you make. Your debt can be erased and you can be on your way to financial freedom.

The goal of a budget is not to constrain you or to feel like it is forced. A budget is a tool to free yourself from emotional money decisions and put you on the path towards financial success. Each and every person has their own definition of financial success, but the budget can help us all get there.

Do you have a budget? Has it helped you along the way to financial independence? Let me know in the comments.


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