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We’ve all have felt lost and confused while staring at a stack of bills, wondering what happened.
But here’s the good news: Creating a budget will easily resolve such issues.
Here, I’ll be going through the basics of budgeting and why it’s vital for everyone, including you.
Whether you’re dealing with a sudden windfall, a student saving for that first car, a family striving to make ends meet, or a retiree looking to stretch your nest egg, budgeting is the tool you need that makes your financial journey a success.
Ready to take control of your money matters?
Let’s dive in.
Budgeting Basics: What Is a Budget
A budget is a financial plan that helps you to keep track of your income and expenses, live within your means, and reach your financial goals.
But Why Is Budgeting Important
With a clear and well-structured budget, you can understand where your money is going, how much you’re saving, and whether you’re on track to reach your financial goals.
A budget empowers you to take control of your finances, instills financial discipline, and help you identify areas where you may be spending more than necessary.
By planning and monitoring your spending, you can minimize financial stress and make more informed decisions.
Whether you’re saving for a specific purpose or simply striving for financial stability and success, a budget helps you to navigate your financial journey confidently.
Budgeting is Just the Starting Point
Truth be told, simply having a budget isn’t good enough.
CNBC reports that 79% of households with budgets overspend, particularly on online shopping (40%), groceries (39%), and subscription services (37%).
According to certified financial planner Josh Nelson, founder and CEO of Keystone Financial Services, many people struggle with overspending regardless of how much they earn.
The lesson here?
Managing your money habits is equally crucial to your overall financial health.
Now, let’s get to how to start a budget.
Budgeting 101: How to Budget Money
Here’s a step-by-step guide to budgeting that simplifies the process and sets you up for success.
Step 1: Get to Know Your Net Income
Your net income is the money you get to spend after taxes.
If you’re a salaried employee, this is straightforward. If your income varies every month – such as freelancing – you should take an average of your earnings over the past 6 or 12 months. Deduct the estimated taxes from this average, and you have your estimated take-home pay.
This can be tricky initially, but your estimates will be more accurate with some practice.
Step 2: Break down “Expenses” into Needs, Wants, and Savings
Understanding your expenses is essential for managing your budget.
Here’s how you can break it down:
Needs: These are your essential expenses, like rent, mortgages, groceries, utilities, and bills.
Wants: This includes non-essential spending, such as dining out, entertainment, and luxury items.
Savings: Setting aside money for future needs like retirement, emergencies, or specific goals.
Identifying Needs & Recognizing Wants
Needs: These are the must-haves for daily life; they ensure a healthy and stable life.
Wants: These are nice-to-haves but are optional.
Examples of Needs and Wants
Needs:
- Shelter
- Food
- Clothing
- Healthcare
- Transportation
- Utilities
Wants:
- Designer Clothing
- Eating Out
- Luxury Cars
- Vacations
- Gadgets and Electronics
- Premium Entertainment
- Home Upgrades
Now that you’ve grasped the essential distinction between needs vs wants, let’s jump into a comprehensive list of budgeting categories.
| Categories | Sub-categories |
| Housing | Mortgage or rent, Property taxes, Household repairs and maintenance. |
| Transportation | Car payment, Gas, Maintenance, Parking fees, Repairs, Others. |
| Food | Groceries, Dining-outs, Food deliveries. |
| Clothing | Adults’ clothing and shoes, Children’s clothing and shoes. |
| Utilities | Electricity, Water, Garbage, Mobile Phone, Cable, Internet. |
| Healthcare | Dental care, Specialty care (e.g., dermatologist), Urgent medical care, Medications, Medical devices, Primary care. |
| Insurance | Health insurance, Homeowner’s or renter’s insurance, Property insurance, Auto insurance, Life insurance, Disability insurance, Others. |
| Household | Toiletries, Cleaning supplies, Tools |
| Personal | Gym memberships, Salon services, Haircuts, Personal care products and services, Other subscription services. |
| Debt | Personal loans, Student loans, Credit cards, Mortgages (Investment Properties), Car loans. |
| Education | Child’s college tuition fees, Your college tuition fees, Books, Accommodations, Others. |
| Savings | Emergency funds, Sinking funds, Child’s college fund, Your college fund, Others. |
| Gifts | Christmas gifts, Birthday gifts, Anniversaries, Special occasions. |
But simply categorizing isn’t enough. It’s time to dig deeper and analyze your spending in detail.
Let’s look at two main types of expenses: fixed and variable.
Understanding Fixed and Variable Expenses
What is a Fixed Expense
Fixed expenses are costs that don’t change from month to month, such as your rent or mortgage payments, insurance premiums, or your Netflix subscription. These fixed expenses are the baseline of your monthly spending.
Examples of Fixed Expenses:
- Rent or Mortgage
- Insurance premiums
- Gym Membership
- Subscription services
- Student loans
What is a Variable Expense
Variable expenses, however, fluctuate. One month you might spend more on groceries or gas and spend less the next. These ever-changing expenses are often where you can adjust to stay in line with your budget.
Examples of Variable Expenses:
- Dining Out
- Utility Bills
- Gas
- Car and Property maintenance
- Entertainment
- Personal care
Now that you’ve broken down your spending into fixed and variable expenses, it’s time to roll up your sleeves and dive into the nitty-gritty.
Here’s how you can pinpoint where you’re overspending:
- Review your past month’s bank statements and categorize them.
- Identify areas to cut back or tweak.
- Explore tools like the Mint Budgeting App to track your finances.
By embracing these steps, you’ll grab the reins of your financial life and have the power to guide where your money flows to.
Step 3: Set Inspiring yet Practical Goals
From owning a home to planning for retirement, your financial dreams can become a reality.
But first, you have to start defining your short-term, mid-term, and long-term financial goals.
Here’s how:
Short, mid, and Long-term Aspirations
- Short-term Financial Goals (Within 1 Year): These could include immediate objectives like saving for an emergency fund, paying off debts, or taking a holiday.
- Mid-term Financial Goals (1-5 Years): These include saving for a down payment on a house, a car, paying off debts, or building a side hustle.
- Long-term Financial Goals (5 Years and Beyond): These are your grand plans, like paying off your mortgages, children’s education, or planning a comfortable retirement.
Using the SMART Goal-Setting Method for Success
Use the SMART method to establish clear financial goals:
- (S)pecific: Clearly state why and what you want, e.g., “I want to save $6,000 for an emergency fund in 12 months in case of unexpected situations like medical emergencies.”
- (M)easurable: Establish a clear and quantifiable target to measure progress. For instance, your goal of saving $6,000 in 12 months is $500 monthly. Next, outline the plan to save $500 a month.
- (A)chievable: Set ambitious but attainable goals.
- (R)elevant: All your goals should lead you where you want to go.
- (T)ime-Bound: Set deadlines for each goal, like aiming to save $6,000 for an emergency fund in 12 months.
With this approach, you’ll know where you’re going, how to get there, and why you want to be there.
It won’t be smooth sailing, but your goals will soon be within reach with careful planning, determination, and regular monitoring.
Step 4: Select the Right Budgeting Method
Here are a few popular ones among the many different types of personal budgets:
- The 50/30/20 Rule: 50% for needs, 30% for wants, and 20% for savings. Great for a straightforward approach.
- Zero-Based Budgeting: Every dollar has a job. Perfect for detail-oriented folks.
- Envelope System: Physical cash for different categories. Excellent for those who prefer using cash.
Do you prioritize control, flexibility, or simplicity?
Select a budgeting approach that aligns with your current financial situation, goals, and individual preferences.
Step 5: Monitor and Adjust Your Budget over Time
- Implementing: Start by choosing your preferred type of budgeting method.
- Tracking: Are you adhering to your plan, or are adjustments necessary? Consistent monitoring is essential to stay on track.
- Reviewing: At the end of each month, evaluate your budget. Are there any unnecessary spending? Areas that need more of your attention?
Your budget must change accordingly as you grow and your life circumstances evolve.
Avoid These Typical Budgeting Mistakes
Even with the best planning, mistakes can happen.
So, let’s go through some of the common budgeting blunders and how to avoid them.
Even with the best planning, mistakes can happen. So, let’s go through some of the common budgeting blunders and how to avoid them.
1. Don’t Let Expenses Slip by You
One of the biggest reasons people overspend is that they’re not keeping an eye on where their money is going.
The Solution? By tracking every purchase, you can see exactly where you might be overspending and where you can cut back.
Stick to your budget, regularly review it, and monitor your spending to stay on track and avoid unnecessary expense. Don’t just set it and forget it. Tracking your spending will have you in control and making informed choices that align with your financial goals.
2. Unplanned Shopping Sprees
You walk past a store or stumble upon an online sale and something catches your eye. Before you know it, you’ve swiped your credit card on something you never planned to buy. And with online shopping now, there’s more temptation to splurge than ever before.
The Solution?
- 24 Hours Waiting Period: Sit on it for a full day, whether in-store or online. You’ll be surprised how often the feeling of wanting it fades away.
- Cash-Only Approach: When you have to hand over your cash physically, you’re more likely to think twice about buying it.
- Reflect on Your Goals: Think of what that money could do for you: contribute to a vacation fund, bolster your savings, or any other financial goals.
- Set a Spending Cap: Set a clear budget for online shopping, and stick to it.
Unplanned splurges can happen to anyone. Still, with a bit of mindfulness and a few simple actions, you can keep them in check.
3. Never Neglect a Safety Net
We all know life has its surprises.
And not having an emergency fund can turn a minor setbacks into a major headache. Without a safety net, unexpected expenses like car repairs or medical emergencies can derail your budget completely.
The Solution? Start building an emergency fund right away. Even a little bit every month can make a big difference. If it seems too tough on your current income, you need to start a side hustle.
Avoiding common budgeting mistakes can mean the difference between financial freedom and never-ending money stress. By keeping a close eye and resisting those impulsive spending, tracking every dollar, and building an emergency fund, you’re laying down a path to financial success.
Now that you know what mistakes to avoid, it’s time to equip yourself with the appropriate tools to simplify the budgeting process.
Picking the Perfect Budgeting App for You
Let’s explore some of the best budgeting apps to see if it’s the right fit for you:
1. Mint: Track Finances with Ease
This free app does everything from daily budget planning to credit monitoring.
Best For Individuals Who Want:
- Comprehensive expense tracking
- Personalized budgeting
- Credit score monitoring
- Robust safety and security features
Pros:
- Free to use, with great reviews on App Store and Google Play
- Syncs financial accounts for full tracking (including bills)
- Personalized and unlimited budget categories
- Free credit score monitoring
- Free to use
Cons:
- Not ideal for those wanting a hands-on approach
- Includes in-app ads with no ad-free option
Mint provides a one-stop solution for your financial tracking needs. If you don’t mind a few ads and prefer automated assistance, it could be your perfect budgeting partner.
2. YNAB: Tailor Your Budgeting Journey
Are you looking for a hands-on budgeting app? YNAB might just be the app for you.
YNAB lets users plan their earnings and assign funds to expenses, goals, and savings based on zero-based budgeting. It also enables you to link your checking, savings, credit cards, and loans.
Best For Individuals Who Want:
- Hands-on budgeting
- Proactive financial planning
- Educational budgeting resources
- Those who prefer a no-ad, paid solution
Pros:
- Emphasizes zero-based budgeting for complete control
- Automatic and manual account linking
- Financial education
- Free live workshops to help you get started
- An ad-free experience
Cons:
- It may be too hands-on or time-consuming for some
- The learning curve is steeper than others
- No free version beyond a 34-day trial
- Pricier at $14.99 per month or $99 per year
YNAB appeals to those ready to take charge of their finances. With its flexibility, education resources, and no ads, it’s a refreshing option. But be mindful – it requires commitment and investment.
3. Honeydue: A Couples-friendly Financial Tool
Honeydue allows both partners to sync various financial aspects, including bank accounts, credit cards, or investments.
What’s unique? You can choose what to share and it helps automatically categorize expenses. You can also customize your own categories, set monthly spending limits, and bill reminders.
Honeydue offers joint bank accounts for couples with no monthly fees or minimum amount required. Your deposits are insured by Sutton Bank, a member of FDIC. The app includes resources for couples to manage finances and an in-app chat to conveniently discuss specific expenses.
Best For Couples Who Want:
- Sync finances
- Coordinating bills and tracking spending
- Reflecting on past expenses more than future planning
Pros:
- Tailored for couples: financial collaboration made easy
- Syncing various financial accounts: individual, joint, or all
- Automatic and customizable expense categorization
- Spending limit alerts, bill reminders, and in-app expense splitting
- In-app chat feature for couples to discuss specific expenses
- Joint bank account option with free ATM access, no monthly fees, and minimum required.
- Strong security: data encryption, Touch ID, multi-factor authentication
- Free to use
Cons:
- Focuses more on tracking expenses; less on creating and tracking your financial goals
- In-app ads; no ad-free version
Honeydue shines as a platform for couples looking to align their financial paths. Its unique tools make it a promising pick for those navigating the waters of love and money together.
Take Control & Shape Your Financial Destiny
When you’re just starting out, budgeting can feel a little overwhelming at first.
However, it is a necessity. Budgeting will empower you to take control of your finances.
Now, you’ve got the tools and all the knowledge right here. The ball is in your court. Your financial future? It’s in your hands.
Take that first step. Start implementing what you’ve learned today, and watch how your finances start turning around.
Decide on a budgeting method and get going now!
