Chris Bridges, Founder and CEO, VITAL Card Inc.
Budgeting for Beginners: Follow These Rules
Setting up a budget is a great way to help ensure you always have enough money each pay period. You can easily plan ahead by understanding where your money comes from and goes every week or month.
Budgeting can also help with other aspects of your life, such as reaching financial goals and handling unexpected expenses. Take control of your finances by learning the basics of budgeting for beginners, including how to make a budget.
What Is a Budget?
A budget is an estimate of income and expenses over a specified period. Budgeting involves creating a plan to spend your money. Budgeting helps ensure you have the wiggle room to enjoy your life without worrying about falling short on living expenses.
The key to successful budgeting is to align your spending with your priorities. When it comes to personal finance, it is essential to figure out your financial goals. What do you want to save for? What kind of lifestyle do you want to live?
Answering these questions will help you figure out how much money you need to bring in each month and how much you need to save.
If you’re unsure where to start, sit down and think about what you want your life to look like in five or 10 years. Do you want to own a home down the line? Are you saving for a vacation or other large expenditures? Did you want to pay off credit card debt or student loans?
Once you have a general idea of your goals, you can start creating a budget to help you get there.Regardless of your goals, remember budgeting is all about finding a way to live within your means. Focus on what’s important to you and find ways to save money so that you can reach your budgeting goals.
What Are the Basic Types of Budgets?
One of the critical parts of budgeting is creating a realistic budget. To do this, you need to examine your income and expenses closely. This will help you determine how much money you have to work with each month.
Next, understand the four basic types of budgets.
The 50/30/20 Budget
The 50/30/20 budget, as Investopedia explains, is a simple way to keep your spending in check and ensure you prioritize what matters to you. It allocates 50 percent of your income to necessities like housing, food, transportation, and healthcare.
Then 30 percent goes toward wants like entertainment, dining out, and shopping. Lastly, 20 percent is reserved for savings and debt repayments.
The Envelope Budget
With the envelope budget, according to Nerd Wallet, you may allocate a certain amount of cash to each spending category and physically put it in an envelope. When the money in the envelope is gone, you can’t spend any more in that category until the next period.
The Zero-Based Budget
The zero-based budget, outlined by Oracle, starts with the premise that your income minus your expenses should equal zero. Every dollar must be accounted for and given a purpose.
The Value-Based Budget
A value-based budget prioritizes your spending based on your values and goals. For example, if you value adventure, you might spend more money on travel than someone who doesn’t prioritize that value.
Why Should You Have a Budget?
A budget is helpful for several reasons. First, it allows you to track how you’re spending money and see where your funds are going. As Investopedia explains, this move helps pinpoint areas where you may be able to save money by cutting back on impulse purchases or overspending.
Secondly, a budget can help you ensure you are not spending more than you are bringing in, which can lead to financial problems.
Additionally, budgets provide a way to measure progress toward financial goals. For example, if you plan to save up for a down payment on a house, monitoring your budget can help you stay on track and keep you moving toward that goal.
Budgeting 101: How To Create a Monthly Budget
The process can feel overwhelming if you’ve never created a budget before. With a little bit of planning and breaking down the process into simple steps, you’ll reach your financial or savings goals in no time. There are also helpful budget templates available online.
Here is how to create a simple budget:
Step 1: Determine Your Current Monthly Income
Northwestern Mutual explains that the first thing to do when creating a budget is to calculate how much you bring in each month. This is the money you have coming in each month from all sources of income, including salary, gig work, and investments. Reviewing your bank accounts and adding direct deposit amounts is an easy way to track take-home pay.
Step 2: Track Your Spending for One Month
Review your recent financial statements (like your bank and credit card statements) to determine your monthly spending habits. Bankrate recommends looking at one or two months of spending to paint a picture of your average monthly expenses.
Then, list out all of your regular monthly expenses (such as rent, utilities, food, transportation, and student loan payments) to determine how much you typically spend each month on these items.
Knowing how you spend your money and where you can cut back could help you save money in the long run. Write down everything you spend, even if it’s just a few dollars here and there, especially since more minor expenses can quickly add up.
Step 3: Categorize Your Expenses
Once you’ve tracked your spending for a month, group your expenses into categories. Quicken suggests categories such as housing, groceries, transportation, utilities, and insurance premiums. It may help to categorize fixed and variable costs.
Fixed expenses include your regular monthly bills, such as rent and car payments, and variable expenses include food and entertainment.
Step 4: Set Spending Limits
Forbes recommends constructing hard spending limits in each category. This is where you’ll use your financial goals to decide what’s important to you and what isn’t.
For example, if eating out is a priority to you but buying new clothes isn’t, then you’ll need to allocate more of your budget to the food category than the clothing category.
In addition, find ways to reduce your expenses so that you’re left with more money to save each month, such as canceling memberships that you use less frequently. With these savings, allocate the funds toward your goals.
Step 5: Build an Emergency Fund
Having a reserve fund in place can help you avoid debt when unexpected expenses arise. Your emergency fund should ideally be enough to cover costs for three to six months, depending on your income and lifestyle.
Start small and gradually increase the amount of money you have saved. Consider opening a savings account dedicated exclusively to your emergency fund.
Step 6: Make Adjustments as Necessary
If you find your budget too restrictive or unrealistic after following it for a month or two, make adjustments accordingly. The whole point of having a budget is to make sure your spending aligns with your goals and values.
As your income or expenses change, so too should your budget. Be flexible and adjustable, and add changes as needed.
What Are the Top Personal Finance Apps to Use for Budgeting?
Plenty of useful personal finance apps are available to help you budget and save money. Some top apps include Mint, You Need a Budget (YNAB), and PocketGuard.
Another highly rated option is YNAB, which helps you to stay on top of your finances by giving you a clear picture of where your money is going. The money management app PocketGuard allows users to manage finances by tracking spending and creating budgets.
Key Takeaways About Budgeting for Beginners
One of the most important budgeting tips for beginners is to set financial goals. Setting goals lets you stay focused and save money.
Once you’ve established your financial goals, begin to review your spending habits and plan a budget that will fit your needs. After all, budgets allow you to measure your progress toward goals.
There are four common approaches to budgeting, which include the zero-based budget, the envelope budget, the 50/30/20 budget, and the value-based budget.
Whichever method you choose, the goal is to create a realistic budget that allows you to spend within your means and still have money left over for savings and debt repayments, such as from student loans or credit card debt.
Track your monthly income and expenses. This can be done using a notebook, Excel spreadsheet, or even an app.
Keeping track of your expenses may help you identify where to cut spending and adjust your budget accordingly. For instance, if you’re living at home and eating out regularly, you may want to reduce your eating-out bill.
Personal finance apps and tools can empower individuals to manage their money better. For example, financial products like the VITAL Card have real-time financial tracking functionality. This makes it easy to view spending breakdowns and can help you improve your credit score.
VITAL Card blog posts are intended for informational purposes only and should not be considered financial or any other type of advice.