The Beginner’s Guide to Budgeting

Many people live beyond their means and don’t even realize it. When you want to improve your financial health, the advice you hear most often is to start a budget. Budgeting helps you better understand how you spend your money and shows you ways to manage your money, pay off debt, and save for your future financial goals. Whether you’re new to budgeting or have tried it before and failed, understanding the steps to follow makes budgeting simple for beginners.

Basics of budgeting for beginners

Start planning your monthly budget by calculating how much you receive versus how much you take out each month. Ultimately, you want to end up with a plan that specifically breaks down your income and expenses, so you know how much you can spend and how much you can save each month.

Step 1: List your monthly income

If your only source of income is a one-time job and you receive a regular salary with taxes automatically deducted, your monthly income is the remaining amount. This is called your net income or net salary. If you have more than one job, enter the net pay for each job to determine your total monthly income. If you are self-employed or have outside sources of income, such as a trust fund or parental assistance, enter the exact amounts you receive each month.

Step 2: List Fixed Expenses

Some expenses are fixed, meaning you pay the same amount each month. Household bills that fall into this category include your rent or mortgage payment, student loans, auto loans, and personal loans. These are easy to follow because the monthly amounts should only change if you accrue late payment charges. Budgeting for beginners helps you manage your money so you always pay your bills on time and avoid late fees that blow your budget.

Step 3: List Variable Expenses

Some of your monthly bills fluctuate. For example, if you live in a seasonal climate with extreme temperatures, your heating and cooling bills change depending on the temperature outside. Some utility companies offer budget billing plans that allow you to pay a flat rate each month for services, making it easier to fit this expense into your budget. However, if you use more energy than your billing plan covers, you may have to pay the difference in one large lump sum.

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Other expenses that vary each month include gas, groceries, personal care products, and household items that need to be replenished. Review three months’ bank and credit card statements to create a list of what you typically spend on those expenses. You can also keep all your gas and store receipts for a few months to get an accurate amount for each expense. Whichever method you choose, calculate an average and insert the amount into your budget.

Creating your budget

Once you know how much you plan to earn and spend each month, create your monthly budget. Start big, then get more specific in areas that vary and could hurt your overall budget plan.

Step 4: Consider the budget template

To help create a comprehensive budget, you may want to seek the advice of a financial planner. Most financial advisors recommend following the 50/30/20 model for budgeting. This model suggests that you use 50% of your net pay for needs, 30% for wants, and 20% for savings. Whatever budgeting system you use, choose a tracking method that doesn’t require more time and maintenance than you’re willing to spend or set yourself up for failure.

Step 5: Budget for wants

The main part of your budget should always cover your needs. What’s left is split between the things you want and your savings. Desires may include shopping, eating out, going to the movies, and other activities you enjoy. However, some things, such as food, can belong to both the needs and wants categories.

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Food is a necessary part of life, but it’s hard to figure out how much to budget for groceries. According to the United States Department of Agriculture, Americans spent 5.2% of their disposable income on food at home and 4.7% on eating out in 2016. Although there is no percentage magic of your income that you should be spending on groceries, this average gives you a place to start. To budget for your specific needs and avoid overspending, keep track of your grocery spending over a three-month period and calculate an average to use in your monthly budget.

Step 6: Reduce your expenses

If your budget shows that your expenses exceed your income, look for ways to reduce your expenses. One of the easiest ways to reduce your expenses is to assess how much money you’re spending on the things you want, but don’t necessarily need. For example, a night out with friends costs an average of $81, which really adds up if you go out several nights a week. That doesn’t mean you can’t go out and have fun, but you may need to limit your spending to make your budget work.

Another way to reduce your expenses and control your finances is to see if you can reduce the cost of certain services. Contact cell phone, internet and cable TV providers to see if a competitor has a better deal or if you can save money by bundling. Consider ditching the premium cable TV channels and opting for a budget basic package. You can also explore low-cost streaming options available online.

Setting goals

Creating goals and rewards is a fantastic way to increase your chances of budget success. For example, set a goal to save a specific amount to pay off debt by spending less on unnecessary expenses like dining out, going to nightclubs, or shopping. Put that money in a savings account to earn interest. When you reach your savings goal, reward yourself with a reasonable splurge on something fun.

Step 7: Budget for credit card debt

Eliminating credit card debt should be a major goal in beginner budgeting. When you choose credit cards with bad terms, it’s easy for your debt to pile up. Consider eliminating high-interest credit cards with a balance transfer credit card that offers an introductory 0% APR to minimize your costs. If your budget allows, make an extra payment each month to reduce your balance and help you pay off credit card debt faster.

Step 8: Budget for student loans

Paying for college can be difficult, and 54% of young adults said they took on debt, including student loans, to pay for their education. Interest rates are generally lower on student loans than on other types of loans, and you usually don’t have to start paying until you graduate. However, they are going to be part of your budget for a long time.

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Never take out more student loans than you need to pay for school expenses. Consider refinancing high-interest loans and making extra payments when your budget allows you to get out of student loan debt sooner.

Step 9: Budget for car loans

Besides buying a house, buying a car is one of the biggest purchases you will ever make. Before taking out a car loan, make sure the payment fits your budget. Compare car loan rates from various sources to find the best deal and get pre-approved for a car loan to help you stick to your budget. Go to the car dealership knowing exactly how much you want to spend on the vehicle and how much your monthly payments will be to avoid car buying mistakes.

Step 10: Budget for home ownership

Your monthly housing costs represent the largest part of your budget. If you already have a mortgage, consider the benefits of refinancing your home loan to lower your monthly expenses and the total amount you’ll pay back over the life of your loan. If one of your budget goals is to buy a home, remember that people often want more homes than they can afford. Avoid overspending that creates long-term financial problems by calculating how much you can afford based on your potential down payment, income, and debt.

Budgeting for Better Credit

With good planning and regular review of your numbers, budgeting for beginners helps you get your bills under control. If you’re still having trouble making your monthly payments after creating your budget, take a close look at your finances to find out why you’re overburdened. Your credit score can also negatively impact your budget goals. Look for free credit repair methods and a professional credit repair company that can help improve your score.

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If you are concerned about your credit, you can check your three credit reports once a year for free from the three credit agencies.

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