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How to Start a Budget

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

Having to start a budget might be tedious but it doesn’t have to be boring.

Almost a third of households live by a strict budget according to surveys. And those households report having fewer financial worries and are less likely to live paycheck to paycheck. Budgets are helpful tools to allocate your money towards what’s important.

What is a budget?

A budget is the itemized summary of income and expenses for a given period of time (monthly, quarterly, annually). A budget 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 to start 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 often associate the term with limiting. Budgets are as much about mindset as they are about financial numbers. Budgeting will help you live within your means and push you towards financial success.

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 many of 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 if it is affordable now or later down the road.
  3. A budget can help you identify areas where you’re mindlessly spending money. It’ll help determine areas to stop spending, cut expenses, and save.
  4. A budget can decrease your stress level because you now have a financial plan of action.

Already have a budget but can’t stick with it? Read this article: Avoid these Budgeting Mistakes

What Budgets Include

Before you create your first realistic budget, you need to know how your spending money and your awareness of financial habits are. An unrealistic budget is nothing more than a fantasy.

The first step of the budgeting process includes a clear understanding of where you’re money is going. Ideally, you want to track your spending for a 30 day period. It’s easier to do so on a monthly basis such as July 1 to July 31. There are a few ways to track your spending like:

  • Tracking your spending through a simple spreadsheet inputting your expenses each time they occur.
  • Gather your banking and credit statements and a piece of paper. Write the expenses down.
  • Use expense tracking software like PocketGuard, Mint, and Truebill.

Now, here’s a way to categorize the flow of money.

Monthly Income. You want to know how much money is actually coming in first.

Monthly Expenses. It includes a list of your monthly obligations such as mortgage/rent, loan payments, utility bills, and discretionary spending.

Financial Goals. Financial goals are monetarily quantifiable aspects of your life. They are things that can be purchased such as goods, experiences, and education. These goals are things like savings goals, homeownership, student loan payoff, or once-in-a-lifetime trips. What are your short-term financial goals? Want to buy a home or a luxury car? Maybe you want to go on a worldwide trip or send your kids to college. Or you need to save money or pay off debt.

Read up on learning how to set financial goals and achieve them.

Examples of Financial Goals

  • $1,000 in an Emergency Fund
  • $10,000 for a home down payment.
  • Payoff $5,000 in credit card debt in 2 years.
  • A 7-day cruise costing $1500.

There are a number of ways to start a budget from the traditional to the technological. Whichever approach you take, make sure you’re committed to the success of creating, maintaining, tracking, and sticking with your budget.

You can find the best budgeting app in the marketplace.

How to Start a Budget

Clarify your vision and set financial goals

You’ll need to have a clear picture of the type of life you want to live. Then, set financial goals related to that vision. Decide on what you want to save for and when you’d like to retire.

Gather one month’s income sources

Budgeting is about the best use of your income, so you’ll need to get a better understanding of how much money comes in each month. List and calculate your income sources come from paychecks, dividends, alimony, interest payments, etc.

There’s a simple method you can apply to income. Give yourself a set salary for expenses. Any additional income received during the month or unexpected windfalls goes directly to an emergency fund, savings goals, or investing accounts.

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, and ATM receipts, and any receipts for one month (dining, movies, random purchases, birthday gifts, etc).

This is an opportunity to identify where your money is goind and assess the expenses if they are necessary, unknown, and flat out not needed.

Create categories and calculate

Take a piece of paper or excel sheet and type in the information. Categorize your income into one pile. And categorize your expenses into housing, transportation, utilities, entertainment, food, discretionary, etc. This gives you an idea of the area of your spending that’s eating up your income. It’s helpful to see this to make bold decisions to cut back.

Now, calculate the totals of each pile.  Deduct expenses from income. And you’ll see if you’ve been living beyond your means and uncover places for improvement.

Assess and Re-allocate

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

Track and Monitor

Your success in budgeting relies on the ability to track and monitor your progress. The budget is the blueprint of where you want your money to go. Now, you’ll need to actually track your spending. Using apps like Truebill (read our take on this expense tracking and alert app) can help you keep your budgeting goals in mind.

Now that you understand the importance of budgeting and gathered your documents, it’s time to use the simple 3-Step Budgeting Process.

Want to read a book on budgeting? Check out the books: You Need a Budget and Get Money. These are affiliate links on Amazon that help us keep the site going.

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