Welcome back to the blog! This week we will discuss the importance of a budget. We will also discuss how you can simplify it and make it less scary to create and follow. Budgeting gets a bad name because it is often associated with being broke. In reality keeping a budget keeps you from becoming broke and allows you the ability to take control of your finances. Budgeting is a tool that everyone should have in their toolbox. As the saying goes, money makes the world go round. So why not be in total control and strive for financial independence using a budget. Let’s get into a beginner’s guide to start and maintaining a budget for your needs.
Why budgeting seems so scary
For many, myself included, budgeting seemed very intimidating or scary at first. Especially when you know your spending habits are poor. It can be difficult to confront the issue and see just how bad it actually is. I always thought budgeting was painfully balancing a checkbook at the kitchen table and having hard conversations with yourself or loved ones about how poor you were. Or admitting that you are terrible with money. Naturally I avoided this as much as possible. I didn’t want to have to have these types of conversations because it can be difficult and can lead to a bunch of unwanted stress. That is until I came to the realization that I was only hurting my finances further by not using a budget to keep myself accountable.
Speaking of keeping yourself accountable, that really is the whole point of keeping a budget. Tracking your spending lets you know whether or not you are using your money in the best way possible. For years I convinced myself I was smart enough to keep track of my money just in my head and through mobile banking apps. Turns out that was wrong as I found myself late paying bills or stuck at a gas station filling my car with spare change I was lucky to find. I have literally paid for gas using nickels and dimes more times than I’d like to admit. The incredibly simple answer to my problems was to use a budget, but I was scared to at first. Thankfully I have come a long ways from scraping change to pay for gas and now I feel in total control of my money.
Lets get into how I did it, and how you can as well with a simple beginner’s budget guide.
Simple budget guide for beginners
Step #1 – Pick how you would like to budget
There are tons of options for budgeting these days. Classic pen and paper, Excel, Google Sheets, YNAB, Simplifi, the list goes on. It is important that you pick the best method for you. Personally I think it is too much work and too time consuming to go the pen and paper route and I also don’t want to mess with a bunch of formulas in Excel of Google Sheets to track my budget. Therefore I landed on budgeting apps as the best option for me. Specifically I use YNAB to track my budget. YNAB is similar to the “Envelope System” where when you get an income you then assign every dollar a “job” to various categories for spending. This helps me easily visualize where my money is going before I even spend it. I would suggest you test out various apps and see what fits your style or needs for budgeting the best!
Step #2 – Setup your budget
Budgets are meant to be personalized to your exact needs. Therefore I cannot just give you a template that will work straight out of the box. However I can give you some ideas as to your budget categories and what you should consider including in your budget.
Main Categories
- Credit Card Payments
- Loan Payments
- Bills
- Needs
- Wants
Sub Categories
- Loans
- Your specific credit card (ie Capital One Savor)
- Utilities (Gas, Electric, Internet)
- Rent/Mortgage
- Car Payment
- Groceries
- Eating out
- Gym Membership
- Budgeting app (If needs a monthly subscription)
- TV or Other App subscriptions
- Car or Home Insurance
- Gas
- Personal Savings (Aside from the emergency savings this is more for vacations or saving up for Christmas gifts for example)
- Emergency Fund (I started by saving $1,000 for this but would like to get 6 months worth of my salary saved at some point)
- Shopping (Clothing, games, various wants, its good to spend your money on some fun stuff)
- Various Little Subscriptions or “Stuff I Forgot to Budget For” (I assign about $20 to this and covers little Apple subscriptions that are $0.99)
Step #3 – Calculate monthly income and compare to budget requirements
This step is the most time consuming but also the most important when first setting up a budget. It is vital that you know how much money you make in a month so you know how much you can spend on each category listed above. This is your debt to income ratio. Completing this step will tell you if you are spending too much money and creating more debt for yourself. Or it will tell you that you are making plenty of money to cover your needs and you have some room for saving.
All you have to do is add up the payments required from all of your categories and subtract that number from your monthly income. You will end up with either a negative number or a positive number. Once you have done this and have your numbers in mind (would also be good to write this number down) go to step 4.
Step #4 – What to do with a NEGATIVE number
If you completed step #3 and found that when you subtracted your monthly costs from your income and came up with a negative number, it means you are spending too much. From here you will need to decide on what you can do to change your spending habits to have more income than debt. This could be downsizing your house on the extreme end, or just spending less money eating out on the simpler side of things. Since a budget is so personal I can’t tell you exactly what to do. Just know that the end goal is to make more money per month than what you spend. If you do spend more than you make, do not become discouraged at this step. It just means that a budget is perfect for you and will have a meaningful impact in your life!
Go back to step #2 and analyze what categories you can spend less on or maybe what subscription services you should cancel to save some money.
Step #4 – What to do with a POSITIVE number
Good news! If you subtracted your monthly costs from your income and came out with a positive number then you are in a good place. It simply means you are making more money each month than what you are spending. This allows you to pay off any debt quicker and gives you some room to save money for emergencies or that next vacation you have been wanting to go on.
Now it is time for you to decide what you do with the extra money. If you have debts you would like to payoff quicker than making a second payment each month could help! Or if you don’t have much debt as is then maybe it is worth considering saving up to 6 months of income for emergency purposes.
Move on to step number 5 and I will explain the benefits of having extra income to pay off debt or save money.
Step #5 – You have some extra income, what can you do with it?
Clearly this step is meant for you to provide an answer to yourself. However I can suggest some ideas that can motivate you to either save or spend your money in the best way possible for your situation. So I will list a couple examples for you to get some ideas from.
Example #1 – Bob has an extra $200 per month after expenses. Bob also have some credit card debt and is making the minimum payments. I would suggest that Bob could use the extra $200 to make a larger monthly payment towards the debt to fast track being debt free. Being debt free or becoming debt free is an aspirational goal many people chase and if Bob has the extra money to fast track this process, it would be wise to.
Example #2 – Jill has an extra $200 per month after expenses. Jill is already debt free or has very little debt to begin with. I would suggest that Jill then uses the $200 to save for emergencies. Could start by saving a baseline $1,000 dollars to cover any incidents with health, car, home, or other emergency expenses. This could save Jill from taking on debt if something was to happen. After the initial $1,000 is saved, many would suggest saving up to 6 months worth of income (and I would agree with this advice). This gives Jill a large cushion for not only emergencies but also potential loss of employment.
Of course these are very basic examples and your needs likely won’t be this exact. For me I am both paying off debt and saving simultaneously. So figure out what you would want or need most for your situation and use that extra bit of cash the way you see fit. I would just recommend using it to pay off debt or save as much as possible. Especially if your budget allows you to do some shopping for yourself and family and still live comfortably month to month without feeling too restrained.
Step #6 – Keep up with it
Budgets are ever changing. We take on new responsibilities and debts all the time. Or maybe Netflix released a new show you are dying to watch and you decide to subscribe to their service. Be sure to add these changes to your budget and verify you are keeping your debt to income ratio manageable. It is okay to spend money, you just need to be good about knowing where it is going! Personally I check my budget almost daily just to be sure my bank accounts match what my budget says I can spend my money on.
Congrats, you have your budget and you’re ready for what comes next!
Budgeting is not sexy, and it rarely is fun. However, paying off debt and being more financially stable is definitely worth the hassle. Furthermore, budgeting can be enjoyable if you come at it with the right mindset. Currently I am enjoying just seeing my debt melt away and my savings grow. If you can find enjoyment in budgeting your life will be all the better for it. Find something that motivates you to stay on track. This can be that dream vacation you want to save up for or the house you would like to be able to afford someday. A budget will get you there with time and diligent tracking of your spending habits.
If you have any comments or questions please feel free to post in the comments below or reach out here! I would love to help you out on your journey to being more financially free. If you would like to support me on YouTube please check out my channel here!
Until next week. -Kenyan