Budget 101: Budgeting For Beginners Step-By-Step Guide

Couple following a Budget 101 plan

Budget 101: Budgeting for Beginners

If you’re tired of feeling out of control with your money, then I’m glad you’re here. In this post, I’m going to tell you everything you need to know about budgeting so you can get on a spending plan that works for you.

Starting and keeping a budget is one of the most effective ways to get control of your finances, align your spending with your values, and achieve your financial goals.

Don’t be too hard on yourself if you’ve been procrastinating with this important financial habit.  If you’ve never been on a budget, it can feel a little overwhelming at the beginning.

“Budget 101” isn’t a typical course that you’d find in high school or college, so you’re left on your own to figure it out. The good news is budgeting for beginners isn’t as hard as it seems.

I’ll walk you through 7 simple steps for how to set up a budget effectively.  Even if you’re a beginner, you’ll understand how to create a spending plan that tracks your spending and maximizes your income.

Are you ready to learn how to set up a budget and stick to it?  Great!

But first, let’s go over some budgeting basics.

What is a budget?

For some people, the word “budget” can leave a bad taste in their mouths.  It’s synonymous with restrictive or confining, but this is just an unfortunate misconception of this powerful financial tool.

A simple definition of a personal budget is a spending plan determined by estimated income and expenses over a specific period of time.

Said a different way, a budget is a plan you create in advance for managing your income.  You’ll use some of your income for expenses, some for saving, and some for giving. Your budget will reflect how you want to allocate your income across all three areas, without spending more than you earn.

The period of time you choose is up to you.  Many budget by week, and others by month.

And, to the contrary, a budget is actually the *opposite* of confining.  A budget merely provides those financial boundaries that will help you live within your means, stay out of debt, and build your savings.

In other words, a budget gives you control over your money and creates financial freedom.

Overview of the budgeting process

There is an unlimited number of ways you could budget your money because it all depends on your own circumstances and preferences.  However, if you want your budget to be an effective tool that supports your goals, there is a common process across any method you choose.

Just as a budget has a cycle (like weekly or monthly), the budget process can also be described as a loop that perpetually repeats, getting you closer to your goals:

  • define financial goals
  • track spending and understand spending patterns
  • create a budget based on goals and realistic expectations
  • monitor your budget and analyze for effectiveness
  • make adjustments as necessary to align your spending with your values
Budget Process graphic

The budget process is meant to coordinate your financial circumstances with the goals you want to achieve. In this way, you can use your budget as a tool that helps you map out a financial strategy.

Following the budgeting process will increase your awareness of destructive financial decisions and spending patterns that are hindering your progress. You’ll discover what changes need to be made with your lifestyle and your mindset if you want to be successful with your finances.

Of course, we call them “personal finances” because they’re personal. How you choose to budget and carry out the process will be unique to your financial situation.

Your budgeting process will be based on a few factors:

  • which budget method you use
  • how you track your spending
  • how you categorize your expenses
  • how often you update your budget
  • what budgeting tools you use
  • what your money values are

I’ll go over these in detail a little later.  Before we get into setting up a budget, let’s go over a very important task you should complete before you start budgeting.

The importance of setting financial goals

Creating and getting on a budget can feel inspiring, just knowing you’ll finally be on your way to having more control over your money.

But, *sticking* to a budget is another story.

In times of apathy or adversity, you need a strong “why” to keep you going.  Why are you even on a budget?  Why do you have a spending plan?  Why are you choosing to limit your spending at Target?

This is when your financial goals become your motivation to persevere past the feelings and focus on your future. If you want to stay committed to your budget, it’s important to identify those financial goals that your budget will help you achieve.

Some examples might be:

  • Paying off your credit cards
  • Saving up for a large purchase
  • Building up your retirement fund
  • Creating an emergency fund
  • Living within your means
  • Aligning your spending with your values

These are just general reasons why it’s a good idea to follow a budget.  But, get specific with your own goals. Make them *SMART*  so you can easily track your progress.  Also, break your goals down into short, medium, and long-range goals.

Short-term goals are those you can accomplish within a year.  These are the building blocks to achieving your biggest goals.

Medium-range goals can be achieved within 1-5 years. These could include building a 6-month emergency fund, paying off your auto loan, or saving a down payment for a house.

Your long-term goals are those big dreams that give your life direction and purpose.  They require planning, extensive time, and sustained effort to accomplish. These goals can ultimately create the future you want in 5, 10, or 20 years. Paying off your mortgage, fully funding your retirement account, or saving for your children’s college education are a few examples of long-term financial goals.

Your goals will guide your budget, and inform you of those financial decisions that are necessary to accomplish them.

I encourage you to take your time defining your financial goals.  If you don’t have goals to align with your budget, then you’re merely tracking your money without making progress toward financial freedom.

Once you have some goals to focus on, it’s time to move on to step 1 of creating your budget:  getting honest about your current spending habits.

Step 1: Know your current spending habits

If you haven’t been on a budget, you’ll probably need to do a little digging to find out how you’re spending your money now. This will give you a good starting point to creating a budget that’s realistic and reflects your current financial situation.

You’ll also discover those areas where you’re overspending, and what expenses you can either reduce or eliminate altogether.

Track your financial transactions for at least 30 days to get a good idea of your spending patterns. There are a few ways you can do this:

  • Write every expense down, from your mortgage payment to that mocha latte.  Track every dollar that’s coming out of your bank account. You can do this in a spreadsheet, a notebook, or a checkbook register.
  • Download an app like Mint or PocketGuard and link it to your bank account. Streamline the tracking process by assigning labels to various spending categories.
  • Use your statements from the previous 30 days. This works especially well if you use your debit card and online bill pay for the majority of your spending (rather than getting cash from an ATM). Even if you don’t remember what some transactions were for, you’ll still have a general idea of how you’re spending your money.

Next, it’s time to categorize your transactions into the 3 types of expenses in a budget.

Step 2: Identify your expenses

Your budget will consist of fixed, variable, and periodic expenses.  It’s a good idea to know how they’re different, so you can manage them effectively.

Fixed expenses are those that recur on a regular basis, and don’t typically fluctuate a lot. Many times you’re under a legal contract to pay them, so it’s critical that they are a priority in your spending plan.  Bills like your mortgage, auto loan, cell phone, and monthly bank fees are considered fixed expenses. Most fixed expenses are not discretionary and are needed to support your daily living.

Variable expenses are expenses that can be either necessary or discretionary, and they also fluctuate from month to month. These costs are easier to adjust and you can often find options that will reduce (or eliminate) their impact on your budget.  Groceries, entertainment, clothes, personal care items, and hobby expenses are all considered variable expenses.

Periodic expenses (also known as irregular expenses) aren’t paid in every budget cycle.  They may happen annually (like vehicle registration), every 6 months (auto insurance premiums), or whenever an occasion calls for one (like going to the vet or changing your tires).

From your tracking log, categorize each expense into one of these three. This will give you a general idea of what percentage of your income needs to be allocated to each type.

Next step: adding up your income.

Step 3: Calculate your take-home income

If you work a set number of hours a week at a fixed wage, this step will be very easy for you.  But, if you earn commissions or you’re in a service industry where you get tips, your variable income is a little more challenging to plan.

The first step is to write down every source of income you make:

  • Paychecks from your job (or jobs)
  • Any income from side gigs you may have
  • Business income
  • Investment income
  • Alimony or child support
  • Income from rental properties
  • Social security
  • Unemployment

There may be some income sources that don’t pay out every month.  This is when it’s a good idea to create an “income calendar” so you can adjust your budget when your income varies.

Be sure to use your after-tax income for budgeting purposes.  Account for all of the deductions taken out, such as federal and state taxes, social security, 401(k) and HSA contributions, etc.

If your income fluctuates from month to month, there are steps you can take to allow more consistency with your spending plan:

  • Average your monthly income over the last year, and use that amount for your budget every month.  This is like paying yourself a monthly salary, and will require you to save in those months you have a surplus, and use those savings when you have a deficit.
  • Save up one month’s income over the next several months.  Once you have enough, use that amount for your next month’s budget.  Then, as you continue to get paychecks, put those into savings so you can use them to budget for the following month. This is essentially known as living off of last month’s income, and it’s a great way to budget with a variable income.
  • Use the zero-sum budgeting method to “budget as you go”.  As long as you know you’ll make enough to cover all of your necessary expenses within your budget cycle, you can just allocate funds to various categories as you receive them.  The zero-sum method will account for every dollar, so you minimize budget leaks.  Just be sure to prioritize your absolute essentials, and save money to cover those weeks when you earn less.

Step 4: Choose your budgeting strategy

Woman budgeting

To set up a budget, you need to know which budget works best for you. There are many options, but here are the most popular 3 options:

50/30/20 budget

This budget separates your money into 3 categories – fixed expenses, variable expenses, and debt payoff/savings. It’s not a strict method, but it helps you fit your expenses or spending into each category so you can stick to your budget.

Fixed and variable expenses were explained in step 2, and the third category is self-explanatory. Basically, any debt payments besides your minimum required payments on credit cards (which are fixed) will fall into this category.  So do retirement savings, emergency fund savings, and rainy day fund savings. Don’t get hung up on how to categorize; just use your best judgment and do what makes sense to you.

With this budget strategy, you spend 50% of your income on your fixed expenses, 30% on variable spending, and 20% on debt payoff and savings.

This method is very simple, flexible, and won’t get you tripped up on details.  Just assign each expense to one of the 3 categories, then adjust your budget so each category stays within its percentage.

Envelope budgeting

This method assigns an envelope to each category in your budget. You fill the envelope with the allotted amount of cash. Once you spend the money in the envelope, you’re done spending in that category for the month.

This method works well to budget any remaining income after your fixed expenses have been paid.  Having envelopes for categories like dining out, entertainment, or shopping will help you stick to your budget and not overspend.

If you don’t want to follow every dollar in your bank account, this may be an effective method for you.  All you have to do is fill your envelopes with cash, and stop spending when the envelope is empty.

Zero-sum budget

The zero-sum budget gives every dollar a ‘job.’ At the end of the month, you should have a $0 balance – not because you spent all your money, but because you were intentional with where every dollar went.

So, just as you have categories for housing, food, and entertainment, you also assign some of your income dollars to savings, investing, and giving.

This budget method requires more detailed tracking but is very effective for taking control of your finances and maximizing your income. You can read more about this strategy in my zero-sum budget guide.

Step 5: Find a method to track your budget

Once you choose a budget strategy, you need to track it. If pen and paper work for you – go for it. Not everyone likes dealing with writing down every transaction, though.

If you want to go digital, try an online program or mobile app. Many apps, like Mint, automatically sync with your checking account, credit cards, and any other financial accounts to download your data and track your spending for you. I use the website ClearCheckbook, which is like an online checkbook register.

You can also create a spreadsheet in Excel or Google Sheets.  This approach is very convenient because you can personalize it however you wish while having the accuracy of automatic calculations.

One way to make your tracking more efficient is by using a debit card when you can.  All of your transactions will show up on your bank’s website and statements, so you can use this record to update your budget. When you use cash, it’s easy to forget what you spent it on, so categorizing those expenses is more difficult.

Use the method that works for you and the one you’ll use consistently. If you know you won’t write down every dollar you spend, look for an app that you’re comfortable sharing your personal information with and let it do the work for you.

Step 6: Set up accountability

The next step is making sure you stick to your budget. This is an important step in budgeting for beginners because, without accountability, it’s easy to lose momentum and let things slide.

Setting up accountability could look like any of the following:

  • If you’re married, set up weekly, bi-weekly, or monthly ‘money dates’ with your spouse. Use this time to go over your budget and talk about where you’re succeeding and where you may need more help.
  • If you’re single, set up reminders on your calendar to revisit your budget periodically to see how you’re doing. If you notice areas you’re overspending or aren’t sticking to your budget, take the time to figure out what you can change.
  • Meet with a financial advisor if you can’t stay on track. If you find it impossible to stick to a budget or keep yourself on track, consider meeting with a financial advisor. Look for someone who helps with spending, financial goals, and helping you align the two so you can stick to a budget.
  • Automate whenever you can.  Set up payments through your bank’s online bill-pay feature, create automated transfers into savings on a regular basis, and have contributions directly deposited into your retirement account.  This will reduce the number of financial decisions you have to make and help you stay on track with your financial goals.

Step 7: Revisit and revise

Don’t expect to create the perfect budget at first.  Most people need 2 or 3 months to really find their budgeting groove, as they work out the kinks and make adjustments.

When you first start out, look at your budget several times a week.  You’ll probably find that you need to add more money to some categories while reducing the budget in others. This is totally normal, and eventually, you’ll have a better grasp of how you should allocate your income.

After a few weeks, you’ll be able to update your budget once every week or two.  Things will get stabilized and you’ll make fewer changes.  However, it’s important to revisit your budgeting structure occasionally to make sure it still supports your financial goals.

Your budget should be a stable but flexible tool that you use to serve your overall objectives.  Make revisions as necessary to ensure it continues to help you make progress toward your goals.

How to choose the budgeting style that works for you

Just like trying on a new pair of pants, you need to find the budget style that fits you well and suits your personality.

If you’re not a detail-oriented person, you can keep it simple with the envelope method.  If you have more of a type-A temperament, you can get more detailed with something like the zero-sum budget.

You can read reviews online and ask those inside your social circle, but don’t overanalyze where to start. Just pick a method and give it a go.  Try it out for a month or two, and feel free to switch strategies if it’s not working for you.

If you want to incorporate an online tool or mobile app into your budgeting strategy, be aware of the features that are important to you.  Have a list handy as you do your research to find the one that suits your purposes best.

How to choose budget categories and percentages

Dollar bills on top of budget graph

Having appropriate budget categories will keep your spending plan organized and easier to analyze. However, it’s easy to get stuck on which ones to choose and how many to have.

The good news is, there is no right or wrong way to pick your budget categories. You can get as general or specific as you like.  Simply create your categories based on the spending patterns identified in your tracking.

The important thing is to have a category for every single expense.  Whether you have 3 or 33, just make sure you can fit every transaction into one of them.

Here is one example of a budget category list:

  • Income
  • Housing
  • Insurance
  • Utilities
  • Automotive
  • Debt payments
  • Entertainment
  • Clothing & Shoes
  • Groceries
  • Dining Out
  • Household
  • Personal Care
  • Savings
  • Charitable Contributions

When it comes to percentages, you can go super simple with the 50/30/20 budget method.  If you need more structure, you can use Dave Ramsey’s suggestion to limit your mortgage or rent to 25% of your net income and keep all other categories between 5-15%.

Here is an example of budget percentages you can refer to:

  • Housing: 25%
  • Insurance (including health, medical, auto, and life): 10%
  • Food: 10%
  • Transportation: 10%
  • Utilities: 10%
  • Savings: 10%
  • Entertainment (anything fun): 10%
  • Clothing: 5%
  • Miscellaneous: 10%

Budgeting tips for success

Staying on a budget can be challenging, but there are a few steps you can take to make it easier and be successful.

  • Start today.  The sooner you can create and start a budget, the faster you’ll gain control of your finances and start saving more money.  Don’t overanalyze the process – just pick a method to track your spending and start.  You will learn from your mistakes and make changes along the way.
  • Stick with cash. Using cash instead of a card is a proven way to stay within your budget.  Handing over money instead of swiping a card gives you a better idea of how much you’re actually spending and keeps you from going into debt.
  • Use a budget calendar. Catch all of your irregular income and expenses on a calendar so you’re always prepared. Write down important dates (when your auto registration is due, important birthdays, summer vacation, etc.) and see at a glance those occasional expenses you need to budget for.
  • Automate, automate, automate.  I mentioned this before, but it’s so important I’ll say it again.  Automate everything you can to minimize the financial decisions you need to make.  You’ll never miss a bill payment and your savings will grow faster.
  • Get on the same page as your partner.  Setting up a budget isn’t meant to be a chore that’s delegated to one spouse. Sit down with your partner and work out a budget together.  Your spending plan and financial goals need to include both of your inputs. This way, you’re on the same page and working together as a team.
  • Review your budget regularly. A budget is not a set it and forget it process.  Be sure to review your spending plan (preferably with your partner) and make those adjustments that better align it with your financial goals.
  • Don’t turn a comma into a period.  In other words, if you get to a point where you’ve paused your budgeting habit for whatever reason, don’t make that a reason to stop. Pick up where you are and keep going! Just like any other habit, sometimes you’ll get off track.  The important thing is to try again.

How to avoid busting your budget

The most common reason people go over budget is spending too much money.  If you want to stay within the limits you set in your budget, you’ll need to be practice some good ol’ self-control and delayed gratification.

Overspending is often a result of emotional or impulse purchases. When you go shopping in a heightened emotional state, you become vulnerable to shopping decisions based on how you feel and not on what you value. These unplanned purchases will bust your budget every time.

If you tend to be an impulse shopper, make the effort to build some self-awareness around your shopping habits.  Take the time to identify those triggers that cause you to overspend, and be intentional with avoiding tempting situations.

A few steps you can take to minimize overspending are:

  • Commit to a cash-only budget
  • Hold yourself to a 24-hour waiting rule for any unplanned purchase
  • Freeze your credit cards or keep them at home
  • Adjust your budget to include a “spontaneous” category

Besides giving in to emotional spending, there are a few other pitfalls that will result in budget fails.

Creating a spending plan based on unrealistic expectations will inevitably lead to going over your budget. Don’t try to conquer bigger goals than your income can achieve, or else you’ll end up feeling frustrated and disappointed.

Also, using guesstimates in your calculations can slow down your progress and leave you wondering why you’re budget is broken. Don’t rely on your memory or settle for “close enough”.  Be diligent about recording exact numbers, and take the time to look at previous bank statements if you need to.

The last barrier to successful budgeting that I want to mention is the unwillingness to make significant lifestyle changes. If you’ve been stuck in a paycheck to paycheck cycle, you may need to make some tough sacrifices in order to stay within your budget and still achieve your goals.  This could mean downsizing your home, selling a car, not paying for your children’s college, or moving to a lower-cost neighborhood.

Your budget is meant to be a tool that helps you get closer to financial freedom.  Don’t let your current lifestyle choices keep you from the future you really want. Be willing to do what you need to do so your future self has financial security.

Budgeting tools to help you stay on track

Woman using cell phone

If you work best with pencil, paper, and a simple calculator, then feel free to stick with those tools.  But, there are many more resources available that can make budgeting easier, faster, and more efficient.

I’ve mentioned a few tools already, but I’ll also include them here along with a few others that are helpful with budgeting:

Some of these can track your spending automatically, which can be really convenient.  However, I don’t recommend relying on an app to do this when you’re just starting to budget.  Taking a hands-on approach in every aspect of your finances will help you stay tuned in to what your money is doing. Once you have a good handle on sticking with a spending plan, you can hand over the tracking to a digital tool.

Budget 101 key takeaways

If you’re ready to admit you don’t know how to budget or where to start, you’ve taken the most important first step. Congratulations!!

Budgeting for beginners isn’t as hard as it seems, and I hope this post has given you some helpful guidance.

Just as a quick overview, here’s a handy checklist to give you some action steps to take now:

Budget 101 Checklist

Creating a budget is the beginning of a journey toward financial control. Your financial goals are the destination you want to eventually reach.  In between, there will be many distractions, temptations, and barriers that can keep you from making progress.

You will probably encounter many points along the path where you go off course.  There will be times when you’ll want to stop moving forward and even go backward. You may even decide to take a detour or a different route.

Don’t let these delays keep you from trying again. The only reason you’ll fail is if you give up!

Even though you didn’t take Budget 101 in school, it’s never too late to start fresh and make better decisions with your money. The sooner you start, the more in control you’ll feel and the faster you’ll meet your financial goals.

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