Budgeting for Beginners

Many people live above their means and don’t even realize it. When you want to improve your financial health, the one piece of 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 debts and save for future financial goals. Whether you’re new to budgeting or you’ve tried it before and failed, understanding which steps to follow makes budgeting for beginners simpler.

Basics of Budgeting for Beginners

Begin planning your monthly budget by figuring out how much you have coming in versus how much is going out every month. Ultimately, you want to end up with a blueprint 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 Monthly Income

If your only source of income is a single job and you receive a regular paycheck with taxes automatically deducted, your monthly income is the amount left over. This is called your net income or take-home pay. If you have more than one job, list the net pay for each job to figure out your total monthly income. If you’re self-employed or have outside sources of income, such as a trust fund or parental assistance, record the exact amounts you receive every month.

Step 2: List Fixed Expenses

Certain expenses are fixed, which means you pay the same amount each month. Household bills that fall into this category include your rent or mortgage payment, student loans, automobile loans and personal loans. These are easy to track because the monthly amounts should only change if you rack up charges for paying late. Budgeting for beginners helps you manage your money so you always pay your bills on time and avoid late fees that bust your budget.

Step 3: List Variable Expenses

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

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

Creating Your Budget

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

Step 4: Consider the Model Budget

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 you use 50% of your take-home pay for needs, 30% for wants and 20% for savings. No matter which budget system you use, choose a tracking method that doesn’t require more time and maintenance than you’re willing to spend on it to avoid setting yourself up for failure.

Step 5: Budget for Wants

The primary part of your budget should always cover your needs. What’s left over is split between the things you want and your savings. Wants can include shopping, dining out, going to movies and other activities you enjoy. However, some things, such as food, can fall into both the needs and wants categories.

Food is a necessary part of life, but it’s difficult to figure out how much to budget for groceries. According to the U.S. Department of Agriculture, Americans spent 5.2% of their disposable income on food at home and 4.7% on eating out in 2016. While there isn’t a magic percentage of your income you should spend on groceries, this average gives you a starting place. To budget for your specific needs and avoid overspending, keep track of how much you spend on groceries over a three-month period and calculate an average to use in your monthly budget.

Step 6: Trim Your Expenses

If your budget proves your expenses outweigh your income, look for ways to cut back. One of the easiest ways to trim your expenses is to evaluate 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 multiple nights per week. This 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 cut your expenses and get control of your finances is to see if you can lower the cost of certain services. Contact cell phone, internet and cable television providers to see if a competitor offers a better deal or if you can save money by bundling. Consider dropping premium cable television channels and opt for an economical 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 chance of budgeting successfully. For example, set a goal to save a specific amount to pay off debts by spending less on unnecessary expenses like dining out, nightclubbing or shopping. Put this money into a savings account to earn interest. When you meet your savings goal, reward yourself with a reasonable splurge on something fun.

Step 7: Budget for Credit Card Debt

Wiping out credit card debt should be a major goal in budgeting for beginners. When you choose credit cards with bad terms, it’s easy for your debt to mount up. Consider eliminating high-interest credit cards with a balance-transfer credit card that offers a 0% introductory annual percentage rate to minimize your costs. If your budget allows, make an extra payment each month to get your balance down and help you pay off your credit card debt quicker.

Step 8: Budget for Student Loans

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

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

Step 9: Budget for Auto Loans

Other than buying a home, buying a car is one of the biggest purchases you’ll make. Before taking on an auto loan, ensure the payment fits in your budget. Compare auto loan rates from various sources to find the best deal and get pre-approved for a car loan to help you stay within your budget. Go into 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 Homeownership

Your monthly housing costs takes the largest chunk of your budget. If you already have a mortgage, evaluate the benefits of refinancing your home loan to cut your monthly expenses and the total amount you’ll pay back over the life of your loan. If one of your budgeting goals is to buy a home, remember people often want more house 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 obligations.

Budgeting for Better Credit

With the right planning and regularly reviewing your figures, budgeting for beginners helps you stay on top of your bills. If you’re still having trouble making your monthly payments after creating your budget, look closely at your finances to learn why you’re overextended. Your credit score may also negatively impact your budget goals. Seek free credit repair methods and a professional credit repair company who can help you improve your score.

If you’re concerned about your credit, you can check your three credit reports for free once a year. Sign up for Credit.com’s free Credit Report Card to track your credit. Receive the latest tips and advice from credit and money experts, an easy-to-understand breakdown of your credit report information and a free credit score and action plan.

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