by Stephanie Bolling for The Penny HoarderThis article was originally published on The Penny Hoarder
Setting up a budget is about as exciting as going to the dentist. It’s challenging. You’re forced to face your spending habits and then work to change them.
But creating a budget will set you free. When you decide to make a budget, it means you are serious about your money. Maybe you even have some financial goals in mind.
If you’re creating a budget for the first time, remember that the end result will bring you peace of mind and that budgets will vary by individual and family. It’s important to set up a budget that’s a fit for YOU.
Budgeting for Beginners in 5 Painless Steps
Follow these basic steps and tailor them to your needs to create a monthly budget that will set you up for financial success.
Step 1: Set a Financial Goal
First things first: Why do you want a budget?
Your reason will be your anchor and incentive as you create a budget and stick to it.
Set a short-term or long-term goal. It can be to pay off debts like student loans, credit cards or a mortgage, or to save for retirement, an emergency fund, a new car, home down payment or vacation.
For Lindsey and Jonathan Tuttle, creating a budget was a must because they wanted to buy their first home. After buying the house, the Tuttles continued budgeting. They paid off some credit card debt and had wiggle room for their accident-prone pets.
“I don’t have to worry as much about the crazy things that life throws at us because I know we have the funds put away to deal with most things that come up,” said Lindsey, who is expecting a baby in March.
Once one goal is complete, you can move on to another and personalize your budget to fit whatever your needs are.
Step 2: Log Your Income, Expenses and Savings
You’ll want to use a Microsoft Excel spreadsheet or another budget template to track all of your monthly expenses and spending. List out each expense line by line. This list is the foundation for your monthly budget.
Tally Your Monthly Income
Review your pay stubs and determine how much money you and anyone else in your household take home every month. Include any passive income, rental income, child support payments or side gigs.
If your income varies, estimate as best as you can, or use the average of your income for the past three months.
Make a List of Your Mandatory Monthly Expenses
- Rent or mortgage payment.
- Living expenses like utilities (electric, gas and water bills), internet and phone.
- Car payment and transportation costs.
- Insurance (car, life, health).
- Child care.
- Debt repayments for things like credit cards, student loans, medical debt, etc.
Anything that will result in a late fee for not paying goes in this category.
List Non-Essential Monthly and Irregular Expenses
Non-essential expenses include entertainment, coffee, subscription and streaming services, memberships, cable TV, gifts, dining out and miscellaneous items.
Don’t forget to account for expenses you don’t incur every month, such as annual fees, taxes, car registration, oil changes and one-time charges. Add them to the month in which they usually occur OR tally up all of your irregular expenses for the year and divide by 12 so you can work them into your monthly budget.
Don’t Forget Your Savings
Be sure to include a line item for savings in your monthly budget. Use it for those short- or long-term savings goals, building up an emergency fund or investments.
Figure out how much you can afford — no matter how big or small. If you get direct deposit, saving can be simplified with an automated paycheck deduction. Something as little as $10 a week adds up to over $500 in a year.
Step 3: Adjust Your Expenses to Match Your Income
Now, what does your monthly budget look like so far?
Are you living within your income or spending more money than you make? Either way, it’s time to make some adjustments to meet your goals.
How to Cut Your Expenses
If you are overspending each month, don’t panic. This is a great opportunity to evaluate areas to save money now that you have itemized your spending. Truthfully, this is the exact reason you created a budget!
Here are some ways you can save money each month:
Cut optional outings like happy hours and eating out. Even cutting a $4 daily purchase on weekdays will add up to over $1,000 a year.
Consider pulling the plug on cable TV or a subscription service. The average cost of cable is $1,284 a year, so if you cut the cord and switch to a streaming service, you could save at least $50 a month.
Fine-tune your grocery bill and practice meal prepping. You’ll save money by planning and prepping recipes for the week that use many of the same ingredients. Use the circulars to see what’s on sale, and plan your meals around those sales.
Make homemade gifts for family and friends. Special occasions and holidays happen constantly and can get expensive. Homing in on thoughtful and homemade gifts like framed pictures, magnets and ornaments costs more time and less money.
Consolidate credit cards or transfer high-interest balances. You can consolidate multiple credit card payments into one and lower the amount of interest you’re paying every month by applying for a debt consolidation loan or by taking advantage of a 0% balance-transfer credit card offer. The sooner you pay off that principal balance, the sooner you’ll be out of debt.
Refinance loans. Refinancing your student loan, car loan or mortgage can lower your interest rates and cut your monthly payments. You could save significantly if you’ve improved your credit since you got the original loan.
Get a new quote for car insurance to lower monthly payments. Use a free online service to shop around for new quotes based on your needs. A $20 savings every month is $20 that can go toward savings or debt repayments.
Start small and see how big of a wave it makes.
Oh, and don’t forget to remind yourself of your financial goal when you’re craving Starbucks at 3 p.m. But remember that it’s OK to treat yourself — occasionally.
“I have had to learn that it is OK for me to go out to lunch sometimes or buy myself a new pair of sneakers when mine get worn out,” Lindsey Tuttle said. “I don’t need to deprive myself completely to be successful with my financial goals.”
What to Do With Your Extra Cash
If you have money left over after paying for your monthly expenses, consider building an emergency fund if you don’t have one.
Chris Meadows said saving for an emergency fund made it possible for him to stick to his budget.
When his washer and dryer broke, Meadows used his emergency fund to handle it instead of borrowing money.
“Once you dip into the emergency fund, immediately start building it up again,” he advised.
Otherwise, you can use any extra money outside your expenses to reach your financial goals.
Step 4: Choose a Budgeting Method
You have your income, expenses and spending spelled out in a monthly budget, but how do you act on it? Trying out a budgeting method helps manage your money and accommodates your lifestyle.
Living on a budget doesn’t mean you can’t have fun or splurges, and fortunately many budgeting methods account for those things. Here are a few to consider:
- The Envelope System is a cash-based budgeting system that works well for overspenders. It curbs excess spending on debit and credit cards because you’re forced to withdraw cash and place it into pre-labeled envelopes for your variable expenses (like groceries and clothing) instead of pulling out that plastic.
- The 50/20/30 Method is for those with more financial flexibility and who can pay all their bills with 50% of their income. You apply 50% of your income to living expenses, 20% toward savings and/or debt reduction, and 30% to personal spending (vacations, coffee, entertainment). This way, you can have fun and save at the same time. Because your basic needs can only account for 50% of your income, it’s typically not a good fit for those living paycheck to paycheck.
- The 60/20/20 Budget uses the same concept as the 50/20/30, except you apply 60% of your income to living expenses, 20% toward savings and/or debt reduction, and 20% to personal spending. It’s a good fit for fans of the 50/20/30 Method who need to devote more of their incomes to living costs.
- The Zero-Based Budget makes you account for all of your income. You budget for your expenses and bills, and then assign any extra money toward your goals. The strict system is good for people trying to pay off debt as fast as possible. It’s also beneficial for those living to paycheck to paycheck.
Another money management option is to use a budgeting app. Apps can help you organize and access your personal finances on the go and can alert you of finance charges, late fees and bill payment due dates. Many also offer free credit score monitoring.
Step 5: Follow Through
Budgeting becomes super easy once you get in the groove. But you can’t set it and forget it. You should review your budget monthly to monitor your expenses and spending and adjust accordingly. Review checking and savings account statements for any irregularities even if you set bills to autopay.
Remember to adjust your budget as your spending changes. But even if your income increases, try to prioritize saving the extra money. That will help you avoid lifestyle inflation, which happens when your spending increases as your income rises.
The thrill of being debt-free or finally having enough money to travel might even inspire you to seek out other financial opportunities or advice. For example, if you’re looking for professional help, set up a consultation with a certified financial planner who can assist you with long-term goals like retirement and savings plans.