Congrats on taking the first steps toward financial freedom! Your next question probably is, “How do I start budgeting?” It’s a great question; you’re not alone in asking it! Here are the five easy steps to start budgeting today.
Taking the first steps toward financial freedom isn’t always the easiest thing to do. But it is so worth it. As a budgeting nerd, I also had to ask the question, “How do I start budgeting?” After all, there are so many ways to budget that I stressed out trying to find the perfect way to budget.
You’re going to learn how to get started budgeting, regardless of which method you choose, and how to do that in just five easy steps. This way, you can get started telling your money what to do instead of it being the boss of you.
This post is all about answering the question, “How do I start budgeting?”
How Do I Start Budgeting?
1. Decide what kind of budget you want to use.
There are a few different types of budgets you can use in your household calculations. Which one you choose is up to you, however, I will recommend one type over the other so it will be easier to create a budget template. Creating a budget template is simply taking a paper or spreadsheet and using it to create something you can use each pay period to create your budget.
Some of the more popular types of budgets include:
a. 50/30/20 budget
b. Zero-based budget
c. Envelope system
d. Values-based budget
In this type of budget, you allocate by percentages to your wants, needs, and goals. Fifty percent of your income (or take-home pay) would go to your needs. Needs include groceries, housing, transportation, insurance, and more – basically what you need to live. Thirty percent of your income goes toward wants while the remaining 20% is for future goals. Those future goals can be saving for a home, vacation, car, or more.
The zero-based budget simply means that your income minus expenses equal zero. If you follow a particularly famous personal finance dude with a beard, you’ll hear this one mentioned a ton. He didn’t invent it, but it is popular and the type of budget I use. When you create this budget, every dollar has a job and isn’t left up to circumstance. In the end, every dollar that came in should have received a job or assignment on the way out. There shouldn’t be any money hanging around with nothing to do.
The dude with the beard also made this more popular in recent years. Again, he didn’t invent it, he just helped make it cool again. For this system, you will withdraw your pay from the bank and divide them into designated envelopes. You will only spend what’s in that envelope. Once the envelope is empty, you stop spending.
This system is really impactful if you find yourself constantly in debt or overspending. It’s also helpful if you’ve ever wondered why you have no money even though you make a “good income.”
Here’s a video I made on my YouTube channel, Savvy Budget Girl, on how to get started with this system:
With this budget, you simply allocate money toward the things and experiences you value in life. If you value buying books, you’ll keep that in your budget. If you value lattes, then make sure you have money for that. You aren’t assigning arbitrary percentages to your wants and needs. You are letting what you value dictate where your money goes.
For my household, we use a combination of a zero-based, values-based budget with the envelope system. This is the best way I’ve found how to budget money for beginners.
2. Gather all of your papers.
In my book, “Budgeting for Women,” I recommend gathering your paperwork from the previous 90 days. More if you can. This is because it helps you get a more realistic sense of what you’ve been bringing in and what you’ve been spending. After all, what you spent in December isn’t really a good indication of how you spent money in July.
Since you’re just starting your budgeting journey and I want you to experience success sooner rather than later, I’m only going to suggest you gather papers from the past calendar month. Get your bank statements, pay stubs, credit card statements, etc. You want a complete picture of all of the money that came in and all of the money that went out.
3. List your income and your expenses for the previous month.
On a sheet of paper, in a spreadsheet, or in my budgeting bundle (available on Etsy), list all of your income on one side and all of your expenses on another side. Yup, everything you spend money on. If you’re like most people, you probably did a fair amount of swiping of your debit and credit cards so those purchases should be easy to track. However, if you took out cash and don’t have the receipts, you’ll just have to list this as cash and be okay with not knowing how you spent it (from now on keep your receipts).
You can categorize your expenses by categories if you want to, but it isn’t necessary. I only divide expenses by whether they are fixed (regular) or variable (amount changes each month) or it’s a fund I designate for cash. You can see this in action in this video about budgeting by paycheck:
4. Balance the budget.
Now that you know your expenses and income you need to see if the budget is balanced. In other words, did you spend more than you took in or did you have money left over at the end of the month or pay period with no job (which means the money probably got spent)?
If you have a negative balance because you spent more money than you brought in, look at reducing your expenses and lowering your bills. You may also need to find ways to bring in more money to cover the deficit. This is true regardless of whether you are a high, average, or low-income earner or household. How to budget money on a low income is the same as how to budget money on a high income.
If you had money left over, then I would encourage you to adopt a zero-based budget to make sure your money is actually working for you. Can the money be put into savings for emergencies or toward a newer car? Maybe it’s time to start buying gifts for Christmas, and you want to be ready. You could also take that extra money and apply it to any debt you have. The choice is yours.
5. Create your budget for the next pay period.
At this point, you should have a clear idea of what to include in your budget. I’m not going to show you how to make a monthly budget because the monthly timeframe doesn’t work for everyone. If you only get paid monthly, then budget accordingly. However, if you get paid in another interval, you’ll want to budget according to the pay period you actually have.
In our house, there is a mix of pay intervals so I end up making 3 separate pay period budgets each month. However, by budgeting according to the next pay period, I’m only budgeting the money I’ll actually be receiving, not what I think I’ll be receiving.
Whatever the next pay period is for you, only budget for that period. I do have a monthly bill calendar so that I can see what’s due when and I can make sure the budget covers those expenses, but I do not budget the entire month in advance. And you don’t have to either.
You can check out how I do this in one of my most recent “Budget With Me” videos: