Welcome to a beginner's guide on budgeting, where we’ll go through the essential steps to help you gain control over your finances.
Like many others, I have not always known where to start when it comes to managing my finances. With so much content online, this has always seemed like an overwhelming task. In this blog I’ve created a beginners budgeting guideline from the most helpful steps, tips and tricks I learned on my financial journey.
Whether you're aiming to pay off debts, save for a dream home, or simply improve your financial well-being, this guide will provide you with valuable insights to create a budget that works for you.
The first step in creating a budget is determining your true income. Calculate your earnings after deducting taxes, to get an accurate picture of the money you have. Make sure you include all forms of income, if you have any sources of income that vary we recommend using the minimum. It is important to underestimate rather than overestimate and readjust in the future, if necessary, to avoid drastically exceeding your budget.
To gain a clear understanding of where your money is going, it's crucial to track your spending diligently. Categorize your expenses into necessities, wants, and existing savings contributions. You can tackle this one step at a time by starting with fixed expenses and moving on to the more complicated and variable monthly purchases. Even small expenses like a cup of coffee or hobby purchases can add up significantly over time, so be thorough in your tracking. Consider averaging these costs over a few months to get a more accurate picture. While this step may be tedious it is a great way to get some perspective on your spending habits and sets the stage for the rest of this process.
Identify your financial goals, whether it's buying a house, paying off debts, furthering your education, or any other aspiration. It's important to align your budget with these goals to ensure you're making progress towards achieving them. A key to setting financial goals is to keep them realistic. You don’t want to cut out all of the joy from your day to day or create goals that cause you to skip a month or two saving.
There are various budgeting plans to choose from, we will present a few of the most popular approaches here. It’s crucial you research and find one that suits your needs and preferences. All these plans have similarities and rely on effective allocation and discipline.
One popular approach is the 50/30/20 rule: 50% of your income is allocated to necessities, 30% to wants, and 20% to savings. This is not set in stone as people customize the percentages based on their circumstances and goals, but it is a great place to start if you want to balance your expenses. There is also room for interpretation as some people categorize differently, for example, debts can be considered a necessity or part of the 20% savings depending on your circumstances and priorities.
As you research you will find various recommendations for allocation, so take the time to consider which one is right for you. Another breakdown of the 50/30/20 rule is the 50/30/15/5 rule (recommended by fidelity) where savings are broken down further into 15% towards long term savings and 5% towards short term/emergency savings. This isn’t a wildly different breakdown but it focuses more on how you split up your savings and just goes to show how customizable these plans can be.
Other examples of popular budgeting plans are the Envelope System, an old school method best reserved for people who rely on and use cash for most purchases. This system allots a certain amount to different envelopes/categories every month so if you run out of money in one category you will have stop spending in that area or pull from another part of your budget. While this is outdated, there are apps that can give you a digital version of the envelope system so you can better keep track of your spending.
The Zero-Based Budget, which is good for people looking to meticulously categorize their budget, assumes that at the end of the month every dollar will be accounted for within a category (from groceries vs takeaways to entertainment vs hobbies). This means it is also best for people with fixed incomes as you will have to reassess monthly if your income varies.
The last model we will touch on is the Pay-Yourself-First Budget, this is best for people who don’t want as rigid a system as the others. It means you focus on your priorities first and the remaining money can be spent more freely. If you have debts and bills to pay, as well as savings goals, you can pay these off first and the remaining money will be split through the rest of the month.
Once you’ve worked on your budgeting plan, simplify your budgeting process by automating regular savings contributions and monthly expenses with fixed amounts through direct deposits or by leveraging budgeting features offered by your bank. It’s helpful to pay or set aside money for any fixed expenses as soon as you get paid, this way you see your true balance for the rest of the month.
Regularly monitor your budget and track your progress. Use budgeting apps or spreadsheets to keep tabs on your income, expenses, savings, and debt reduction. By reviewing your progress periodically, you can identify areas that need adjustment and celebrate milestones along the way!
Remember, budgeting is a journey, and it's normal to face challenges along the way. Don't be too hard on yourself if you stumble or encounter setbacks. Instead, reevaluate your budget periodically and make necessary adjustments. Flexibility and adaptability are key to long-term budgeting success as you will be better prepared to handle any curveballs thrown your way.
By starting with these steps, you'll be well on your way to achieving financial stability and reaching your goals whatever they may be. Please keep in mind that nobody's financial situation is identical, so it is important to tailor these steps to best suit your budgeting requirements.
Happy Budgeting!
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