A budget is a necessary tool designed to help you manage your money well. The first and most basic step to gaining control of your finances is to create a budget.
I don’t want to go too much further assuming you know what a budget is, so here’s a quick explanation:
Simply put, a budget is an estimation of income and expenses for a period of time.
You can budget by month, week, or pay period. Choose the time frame that works for you and your income.
A budget will show you where your money is going. You have more control over this than you might think.
Why you need a budget
Plan out what you will do with your money ahead of time, so you don’t spend money you don’t have. You need a clear-cut picture of where your money is going each month for the following reasons:
1 // Financial freedom
Does money stress you out? It doesn’t have to be this way. Financial freedom means that you no longer look up at the end of the month and wonder where all of your money has gone.
Rather than viewing a budget as restrictive, view it as your key to financial freedom.
Your budget is what gives you the freedom to spend when necessary (or when you want to) because you have planned it out ahead of time. You know the money is ready and available.
2 // Pay off debt
If you have debt, you are spending money you don’t have, plain and simple. Creating a budget is one of the first steps you need to take if you want to get out of debt.
Living in debt is stressful and can too easily get out of hand. Don’t believe the lie that credit cards are necessary or important.
3 // Save more money
A budget helps you reign in your spending, which results in more money in your bank account. You can then move that money over to your savings account and watch it grow.
Another method is to create a savings category in your budget and move that money over as soon as you have it.
Either way, if you’re looking to grow your savings, a budget will help you get there.
4 // Achieve your goals
One of the top three answers I get when I ask people what keeps them from achieving their goals is money.
Some are stuck in a job they hate, but they are scared to give up that source of income to do what they really love.
Others feel they need more money than they have to live the life they want to live.
Creating a budget is a simple way to begin managing your money well. Click here to find out how to manage your money like a boss, so you can achieve your goals.
5 // Peace of mind
A study that came out in 2018 shows that money is the number one cause of stress among Americans.
Financial stress is real and it is a heavy burden. Imagine what it would feel like to have no worries in regard to money.
You can have little money or a lot of money. How you manage that money determines the effect it will have on your mental wellbeing.
Following a budget for your earnings is an easy way to take charge of your money rather than letting it take charge of you.
When you are in control of your money and not the other way around, your stress will turn into peace.
Five simple steps to create your first budget
Budgeting is quite simple when you know what you are doing and overwhelming if you do not.
The steps below will show you exactly how easy it is to create your first budget and how to do it right the first time.
1 // Choose a method
There are several different budgeting methods. I prefer zero-based budgeting, especially for those who have a steady income.
You already know how much money is coming in each month. Now you need to decide what to do with that money.
A zero-based budget assigns every single dollar a category. You choose where your money is going to go before you spend it.
This allows you to ahead of time what you will spend your money on each month. Deciding ahead of time makes it more difficult for you to make poor financial decisions.
For instance, say you budget $500 for food in a particular month. You spend $450 and have $50 left.
You can choose to apply that $50 to the next month’s budget or use it to take your family out to dinner.
The money is already assigned, so the choice is yours.
2 // Track your spending
I recommend that you track your spending for one full month before you create your first budget. This opens your eyes and gives you a clear understanding of where your money is going.
You can do this in one of two ways – digitally or with pen and paper.
For those who prefer a digital system, start with a spreadsheet. Use Excel or Google Sheets to create your first tracking system.
Log into your bank account each day and log your transactions in your spreadsheet.
Include the store or entity where the money was spent, assign it a category such as food or bills, and note the amount spent.
You can do this in a regular notebook if you prefer pen and paper. The point is to make yourself aware of your daily spending habits.
As the month goes on, you will notice certain categories begin to emerge and appear more often than others.
Total the amount spent in each category at the end of the month. This will give you a starting point for creating your first budget.
3 // Choose your categories
Common budget categories include:
- Debt payments
- Personal care
You will probably see some of these categories show up as you track your spending. This will give you a good starting point.
I recommend that you keep things simple when you create your first budget. Select the categories you think you will use most often.
Include a category for discretionary spending at the end for any extra expenses that pop up, such as things you forgot to include in your budget.
This will give you a slight cushion and a little room for error as you become more comfortable with the process.
4 // Assign your values
Now you are ready to create your budget! Do this with your spouse if you are married.
It is important for you to both be on the same page when it comes to how you plan to spend your money.
To get started, you must once again if you prefer to set your budget up on the computer or on paper.
You can use a pen and paper, a printable budget worksheet, a spreadsheet, or an online program.
I use YNAB: You Need a Budget. It is a system I can access on my computer or on my phone.
Most online systems require a small investment, but it is worth it to me now that I have been budgeting for quite some time.
I struggle with basic math, so I appreciate that it calculates everything for me once I input the information.
It also provides reports that I can access at any time and evaluate where our money is going.
This is nice to have, but if you are trying to reign in your expenses it’s not necessary as a beginner.
To get started, write down your budget categories and assign each category a value based on past spending and future goals.
Some spending is fixed, while some spending can change from one month to another.
For example, you may find while tracking your spending that you spend more money that you would like on fast food.
Therefore, you might choose to set a food budget that encourages you to spend less money in that category by making a meal plan and cooking most, if not all, of your meals at home.
5 // Check in regularly
The key to making a budget work is to check in regularly and stick to it! How often you do this is up to you, but I recommend a daily check-in for beginners.
It is likely that you will notice there’s not much going on in your bank account once you start deciding how to spend your money.
The thing that surprised me the most when I first started budgeting was seeing how much money remained in our checking account.
This happened because the number of daily transactions drastically decreased due to focused spending.
Seeing this daily is encouraging for those new to budgeting. A daily check-in also helps you keep a pulse on where your money is going.
Seasoned budgeters might not need to check in quite as often, although they still might choose to do so.
I try to never go longer than a week, but a daily check-in gives you a faster reaction time if something doesn’t go to plan.
Now it’s your turn
I hope you can see the benefit of creating a budget. The steps below outline how to do it right the first time:
- Understand why you need a budget
- Choose a budgeting method
- Track your spending for one month
- Choose your budget categories
- Assign values to your categories
- Check in regularly