Here it is, the ultimate “how to budget for beginners” guide to budgeting!
If you’re wondering how to start budgeting for the first time, you’re in the right place!
A budget is essentially a tracking system that shows us how much money we have left after an online shopping spree. In simple terms, anyway…
Nah for real though, a budget is a system that tracks your spending alongside your incoming cash flow to determine your progress towards any financial goals you may have.
For anyone with a job, and things to buy, a budget is essential!
Let’s jump straight into this 10-step guide to setting up your budget… from scratch!
Table of Contents
Where are you at?
Step 1: Figure out WHY
Why do you want to start budgeting? There’s got to be a reason!
Figuring out the WHY is crucial to making sure you actually follow through with your budget. Here are some typical reasons to start a budget:
- I want to save more money
- I want to spend less money
- I want to stress less about my money
- I want more throw-away cash (money you can just spend whenever you’d like to)
- I want to get out of debt
- I want to stop living paycheck-to-paycheck
The why is what will give you the motivation to keep going on the days it seems tough. This is your anchor!
Now it’s time to get into the crux of it…
Step 2: Where is your money currently going?
Let’s start with your expenses!
Where is your money going each week? Do you spend lots on food, or on entertainment, or on clothing?
To figure this part out, we’re going to do a *cleanse*
- Log onto your bank app and open up your latest statement – the one linked to whichever card you use for purchases.
- Print out that statement – only the last month’s worth of expenses
- Go through with 5 coloured pens
- Blue = absolute necessities (i.e. rent, bills like your phone, electricity, utilities, essential groceries, petrol etc.)
- Red = any entertainment (things like subscription services – Netflix, Disney+, leisure like the movies, etc.)
- Pink = clothing
- Purple = takeaway food (this includes anything you’ve ordered at a restaurant – breakfast, lunch, dinner, drinks, snacks, ANYTHING)
- Orange = the rest (anything that is like, a bit random)
- Now go back through and put an astrix (*) next to any expenses that pops up a few times during the month (or over multiple months)
- Add up the total spend for each colour and out those totals somewhere in BIG WRITING
Now let’s see where your money’s coming from…
Step 3: Where does your income currently come from?
If you’re spending money, I think it’s safe to assume that you’re making money too! Now it’s time to figure out just how much you’re making.
- Write down anything that brings in money for you each month (i.e. your job, selling stuff on Ebay, dividends, coaching, etc.)
- Print out the last 3 months worth of payslips from each source of income
- Average that out for each source (the total income in 3 months divided by 3)
- Now add the total of the averages to give you your average monthly income
- Write this total down somwehere in BIG WRITING
What should it look like now?
Where do you want to be?
Step 4: Where can you cut down on spending?
Let’s take a quick look at those expenses…
Notice anything you can cut down on? Maybe you don’t need to have a Spotify subscription along with Netflix, Disney+, STAN, Keyo, OptusSport and any of the others.
Maybe, all you need is Netflix and Spotify?
I don’t know, you tell me! Remember this isn’t supposed to be easy… You want to make a change, which means something has to change :))
Be cut-throat, what could you live WITHOUT each month?
Step 5: What are your money goals?
Now you’ve gotta dive deeper into what you want with your money.
Why do you want more money? Why is your why so important?
This process involves making your why more specific, here are some examples:
- I want to save towards a home deposit
- I want to build an emergency fund
- I want to save for college tuition
- I want to pay off my credit cards
- I want to save for a holiday
Get real specific. Niche down!
Step 6: What will you work towards?
Alrighty, now that you’ve got your goals it’s a matter of deciding just how much you’ll need to save in order to reach them. Again, we’re getting specific here!
Let’s break that goal down into a monthly savings target:
- I want to save towards a home deposit = $20k in 1 year = $1,666 per month
- I want to build an emergency fund = $5k in 6 months = $833 per month
- I want to save for university tuition = $40k in 5 years = $666 per month
- I want to pay off my credit cards = $6k at 10% in 2 years = $275 per month
- I want to save for a holiday next year = $5k in 1 year = $416 per month
What should it look like now?
How will you get there?
Step 7: What type of budget are you going to use?
My favourite budget is the 50/30/20 budget:
- 50% of your income goes to NEEDS
- 30% of your income goes to WANTS
- 20% of your income goes to SAVINGS
The reason I got you to map out everything before wasn’t to just throw it away now. It was to help you see whether or not this type of budget will work for you.
Changing your habits is HARD. So, if you’re currently spending 45% of your income on WANTS, don’t expect 30% to happen overnight!
To actually start budgeting, you should treat any money outflow as an expense (including savings). Now it’ll be a matter of dividing each section of spending up to follow the 50/30/20 budget.
A rule of thumb:
- NEEDS = rent, bills, groceries, min. debt repayments
- WANTS = holidays, entertainment, take-away food, clothing, etc.
- SAVINGS = well, savings…
It’s also worth noting here that you could include X% of NEEDS towards your savings goal. This is something I’d encourage everyone to do if you’ve put a time limit on your goal and so long as your NEEDS don’t already take up 50% of your income!
Step 8: How will you make this budget?
Now, I’m a through-and-through spreadsheet guy when it comes to this stuff.
Excel is my BFF so miss me with that fancy-looking app stuff…
But, I recognise that not everyone likes to be as boring as me! So the app I have tried and think works really well is:
There are plenty of other apps out there, this is just the one I’ve tried and liked the most! (this is not sponsored in any way).
Some of the big bank apps actually have an in-built budget software, so it’s worth checking that out too!
Step 9: Go do it!
The key here is to be consistent. Set everything up and then stick to it. You’ll have good days and bad days so do everything you can to remove any excuses!
Set up push notifications, set reminders on your phone, align everything with your largest paycheck, make sure all outgoings are happening at a convenient time so you don’t forget!
Step 10: Review
Set an event on your calendar to spend 1 hour at the end of each month to track your progress. Are you ahead of schedule? Maybe you slacked off for a week or two…
Make sure to tell your friends and family about your goals and your budgeting, they’ll keep you accountable!
Avoid these common mistakes!
There are a few things to watch out for when budgeting:
Make sure your income is calculated on net pay, not gross! (net = after-tax)
Set realistic expectations – if you’re a bad saver, don’t expect that to change after just 1 month…
Remember, LIFE HAPPENS – there will be plenty of expenses that creep up on you. That’s why we are doing this, so you can be ready for them! It would be wise to work towards an emergency fund goal as your first budget goal so you don’t have to worry about things like this in the future :))
Awesome stuff! You now have a budget!!
It was pretty easy, wasn’t it?
Remember, consistency is KEY! Keep at it, talk to people, share your ideas and aspirations, inspire others, be inspired by others, keep pushing towards your dreams! They’ll come eventually :))
For some more money reading:
Until next time,
Uncle N.