BudgetingManage Money Articles

How to Start a Budget (Simple Approach and Guide)

A budget is a framework that can help you achieve your goals.

According to surveys, almost a third of households live by a strict budget. Those households report having fewer financial worries and are less likely to live paycheck to paycheck. Do you want to belong to that household group?

Budgets are helpful tools for allocating money to what’s important. It’s part of financial planning.

What is a budget?

A budget is an itemized summary of income and expenses for a given period (monthly, quarterly, or annually). It helps you visualize how much income is coming in and where your money is being spent.

Why do you need a budget?

Budgeting is always a good idea; it’s better when you’ve defined your goals before starting the process. Budgeting can be tedious, but it doesn’t have to be boring.

What are the reasons for starting a budget? Well, they include:

  • Need to meet monthly financial obligations
  • To simply save money
  • Eliminate unnecessary spending
  • Stopping fights about money
  • Stressing less about finances
  • Less reliance on credit and limit consumer debt
  • Debt freedom
  • Retiring early and more… 

Many people feel constrained by the word budget and associate the term with limitations. The reality? Budgets will help you live within your means and push you towards financial success.

Budgeting is as much about mindset as it is about financial numbers.

Why Budgeting is Important

  1. A budget helps you understand your cash flow (income and expenses) and gives you the necessary information to make better financial decisions.
  2. A budget can help you achieve your financial goals. Don’t think of it as limiting you from doing what you want to do. A budget is a spending plan that determines whether it is affordable now or later.
  3. A budget can help you identify areas where you’re mindlessly spending money. It’ll also help you determine where to stop spending, cut expenses, and save.
  4. A budget can decrease your stress level because you now have a financial plan of action.

What Budgets Include

There are different budgeting methods available, but most budgets include three parts:

  • Monthly Income. You want to know how much money is coming in first.
  • Monthly Expenses. It includes a list of monthly obligations such as mortgage/rent, loan payments, utility bills, and discretionary spending.
  • Financial Goals. Financial goals are monetarily quantifiable aspects of your life. These goals include savings goals, homeownership, student loan payoff, or once-in-a-lifetime trips.

You can also use expense tracking software: Find the best budgeting apps.

Steps to Start a Budget

There is a simple way to start a budget by following the steps below:

Step 1: Gather one month’s income sources

You’ll need to better understand how much money you earn each month. List and calculate your income sources, such as paychecks, dividends, alimony, interest payments, etc.

Step 2: Gather one month’s expenses

List all your monthly expenses and debt obligations. Your expenses include rent, auto loan payments, utility bills, services like cellphone charges, subscriptions such as Netflix, monthly gas expenses, ATM receipts, and any receipts for one month (dining, movies, random purchases, birthday gifts, etc).

Step 3: Create two columns and calculate

Take a piece of paper or spreadsheet and type in the information. Categorize your income into one column. Then, categorize your expenses into another. Your expenses should include housing, transportation, utilities, entertainment, food, discretionary expenses, etc.

Here’s a budget table with four columns: one for income, one for expenses, and two columns for entering amounts:

Freelance Income$_________Utilities$_________
Investment Income$_________Groceries$_________
Rental Income$_________Transportation$_________
Side Hustle Income$_________Dining Out/Entertainment$_________
Other Income$_________Debt Payments$_________
Total Income$_________Total Expenses$_________

In this table:

  • The Income column lists various sources of income, and the Amount column allows you to enter the corresponding dollar amount for each source of income.
  • The Expenses column includes categories for different types of expenses and the Amount column allows you to enter the corresponding dollar amount for each expense category.

Calculate the total of your two columns. Subtract your expenses from your income. Does your income cover your expenses?

Congrats! You’ve just calculated your cash flow.

Step 4: Assess and Re-allocate

The columns visually represent how your income is being used. This will help you make necessary decisions with your spending. Determine what expenses can be eliminated or reduced.

Truly understand where your money is going and decide if those expenses are meaningful. Make a bold statement to cut out the wasteful spending so you can reallocate those funds to areas that matter.

Want to assess your entire financial situation? Complete a financial checkup.

Step 5: Track and Monitor

Your success in budgeting relies on the ability to track spending and monitor your progress. The budget is the blueprint of where you want your money to go. Now, you’ll need to track your spending.

There are a few ways to track your spending:

  • Inputting your expenses each time they occur in a simple spreadsheet.
  • Gather your banking and credit statements and a piece of paper. Write the expenses down.

Consider automating your finances using expense-tracking software. Find the best budgeting apps.

Exercise: Track your spending for the next 90 days. Review and assess how money is being spent within that time period. Look for patterns and adjust your budget.

Want to read a book on budgeting?

I recommend two books.

Jason Vitug

Jason Vitug is a bestselling author, entrepreneur, and founder of phroogal.com and thesmilelifestyle.com. His purpose to help others live their best lives through experiential and purposeful living. Jason is also a certified yoga teacher and breathwork specialist and has traveled to over 40 countries.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *