I will admit that I am not re-inventing the wheel here. You can do a web search for articles about learning how to budget and you will find hundreds, if not thousands, of articles.
But what you will find here is something a bit different than what you’ll find in many other places.
How so? I take a different view on budgeting.
Most of the articles about learning how to budget you’ll find will talk about making sacrifices and restraining yourself. Sounds extreme.
The way they approach budgeting is looking at it as a negative. Not in the sense that a budget is a bad thing, but the presentation makes you think your life is going to be boring when using a budget.
The truth is that budgeting isn’t boring. And you don’t have to restrain yourself. You just have to look at it differently. Don’t see a budget as having to sacrifice or restrain yourself. Look at it for the possibilities it offers.
When you budget, you do it so that you can reach your financial dreams. You are going down a path towards excitement. But the present doesn’t have to be a chore. It can be fun and exciting too.
Think about taking a walk. You plan to walk around the block. Do you dread every step along the way, only looking forward to the moment you get back home? Maybe if you went for a walk in freezing temperatures and your path was covered in ice.
But most likely you enjoy the walk. You like looking at the scenery and chatting with others passing by. You don’t hate the walk. You enjoy every minute of it.
That is how I want you to look at budgeting. Yes the goal is to reach your financial dreams, but you can have fun while on a budget.
I have to admit, when I put my first budget together, I hated life. I was just out of college and trying to pay off my student loans. I wanted to get rid of them as fast as I could so I only allowed myself to have $25 a month as fun money.
That budget lasted me one month. By the second month, I was acting out against the budget. I was overspending and I didn’t care. The reality was I had no idea what I was doing when I made that first budget.
Since then, I’ve learned a lot. Here is the main thing I figured out when learning how to budget.
It is very difficult, if not impossible, to gain control of your money without a budget.
The first step to controlling where your money goes is understanding where it went in the first place. You will never get out of debt and have financial freedom without looking at your spending and having a goal in mind.
This is where you say, OK, Mr. Easybudget, how do you set up a budget?
Here are a few things you need to know about learning how to budget, before you even make a first attempt at setting up a budget.
The first thing to know is have patience. No matter what information you have, you won’t get your budget entirely right the first time. Or likely even the second. You have to be willing to adjust for probably two to three months before you get a handle on things. And even then, you’ll be making tweaks as the months pass and life happens.
The second thing to know is have perseverance. Don’t give up because your first budget is wildly off. That first budget is the one where we finally learn how much we really spend and what we really spend our money on. Many of us aren’t aware that our Starbucks habit really is that bad.
Now it is time to sit down and set up a budget. But again, keep these two points in mind as you travel down the budgeting road.
Learning How To Budget In 7 Steps
Step #1: Income And Bills
If you are one who keeps track of bills you pay and keeps some of your receipts from purchases, then sit down with your most recent pay stubs and invoices that determine your income from the previous month. Then collect all of the bills and receipts from the previous month as well.
This will be the basis for your first budget. It’s OK if you don’t have every single receipt. You at least need a starting point. Like what was stated before, your first budget won’t be perfect, but at least having a ballpark figure for some categories will keep you from being so wrong that you have to completely start over next month.
Grab a legal pad and pencil and not a pen, at least not yet. At the top of the page, write down your total take-home pay from your pay stubs and other documents. Notice it is take home pay, not gross pay. So that means to use the amount of the check itself or the amount that is direct deposited into your checking account.
If you are self-employed, then take out all of your withholdings, any 401(k) contributions, self-employment tax payments made, etc., to get to your net pay number.
Your net pay number is the amount of money you have available for saving and spending in your monthly budget.
Under that, start writing out your bills you have receipts for.
If you don’t have receipts, you can still do this step. Just log on to your bank account and print out last month’s transactions. If you pay for things on your credit card, print out that statement as well.
Don’t get caught up thinking you need to have every receipt at this point. Just record the majority of your expenses and you can make adjustments in the coming months. The only catch to this to make sure you include any large bills in this budget version. This includes mortgage/rent, car payments, etc.
By the time you are done this step, your budget should look like the image below. Note that I am using a spreadsheet so you can read my writing and easily follow along.
Step #2: Create Categories
Now that you have your income number listed along with expenses, it is time to take a deeper look at expenses. To the right of your listed expenses, start writing general categories for expenses. A desired order would be in the order of importance. In other words, if you have very limited money and you just had to use it for certain things, what would those most important categories be?
Here’s a hint, put down these 7 categories first:
- Tithes/giving – charity is always important
- Savings – put something away for emergencies or to help pay off debt
- Housing – rent or mortgage, property taxes, maintenance, any HOA dues, etc.
- Utilities – cable, electric, water, trash, cell phone
- Food – separated into groceries and restaurants
- Clothing – basic, only what you need
- Transportation – car payment, bus/transit fares, tires, repairs, gas, oil changes, registration fees, etc.
Next, go through your receipts and proof the expenses that you have from the previous month and start categorizing them accordingly. I like to just write down the category each expense fits under next to the expense itself.
If you need a new category for something that does not fit one of the above categories, make one like credit card debt, student loan debt, personal care and so on, writing them on the pad under the seven main categories, until all of your expenses are accounted for.
When you are finished with this step, your budget should look something like the below image. Note that I added in a household category since I have expenses that didn’t fit under the 7 main categories. For me, household expenses are anything I buy for around the house, like cleaning supplied and personal care items.
Step #3: Grab A Calculator
Next, you are to add up the expenses and compare that number to your net income number at the top of the sheet. Do you have less going out than coming in? Is the number a lot less, say more than 10% less? This could mean you are doing very well already, or if you are broke it means you have some unaccounted expenses, and that is where learning how to budget will help you.
On the right side of your legal pad, at the top of the column write “Budget.” This column is where you will put numbers in each category of your budget. This is your target number not to exceed in spending. If you want a general guideline for how much to spend in each category, here you go:
- Tithes/gifts – About 10% of your take-home pay
- Savings – 10% to start, more as you pay off debt
- Housing – 25-35%
- Utilities – 7-10%
- Food – 10-15%
- Clothing – About 5%
- Transportation – 5-10%
Of course, as you add categories beyond this, these numbers will have to be adjusted, because if you’re not using your calculator now, the maximum in these categories would total 95%.
But now that you have an idea what you spent in some categories last month, you can use those plus these percentage guidelines to create a budget for the coming month.
For example, if your take home pay is $3,000, by this guideline you would budget up to $300 to your church or favorite non-profit. You would put $300 in savings and spend up to $1,050 for housing. From there you can spend up to $300 for utilities, $450 for food, $300 for transportation and $150 for clothing.
Again, these are guidelines. Bills have to be paid, so you should fully fund those expenses first and then adjust other categories accordingly. If you have to skip tithing for a month, fine. But don’t leave the savings column blank too. You have to pay yourself in some way, and savings is important especially if you don’t have much savings to speak of anyway.
By accounting for your savings in your budget, you are taking advantage of the simplest way to get rich. Don’t leave savings blank. Ever. Even if you can only save 1% because money is tight, save that 1%.
Here is a sample of what your budget should look like at this point.
Step #4: Set Up Your Budget
Now that you have your previous month’s bills accounted for, you can go back over those categories, erase the numbers and put in a number that will line up with your budget. If you are sure you are not close to the maximum budget percent for that category, don’t stuff the category with extra money.
For example, if you record all of your food costs, both groceries and dining out, and it comes to 9% of your income, don’t adjust your food budget up to 15%. We need some room for adjustments in the coming months.
Remember, the maximum amount in those seven categories accounts for 95% of your take-home pay, so you will have to re-allocate to have money for debt payments, pocket money, gifts, or any additional categories you added in your budget.
Work down the list of categories, remembering to at least put something in savings, even if it’s just $25. Once you have a number for each of the seven categories, fill in the rest of your take-home pay in as many of the categories as you can.
If you don’t think you will need clothes for this month, you can either leave it blank or put in a “down payment” for next month, like $20 as a placeholder. I have placeholders in my budget and if I don’t use that category, the amount rolls over to the next month, then the next, then the next, until I actually do use it. I might have $80 or $100 in clothing available for when I need that new pair of jeans or a new pair of sneakers.
This is also a good idea for those bills that come up every few months. You can divide your annual car-insurance premium by 12 months and put aside that amount every month to pay the bill when it comes due every six months.
Here is how my budget looks after this step.
Step #5: Zero It Out
Having your money allocated into each category is great, but now you have to make the final adjustments, because the total of your outgo has to equal your take-home pay so when you subtract outgo from income the resulting number is zero. This is called zero-based budgeting, and the goal is to make sure that every dollar that is coming in is labeled as it goes out. Every. Single. Dollar.
If you actually have a positive number when you do the subtraction, that may mean you have room to add money into a category. Ideally this money should go towards paying off debt or adding it into savings.
If you have a negative number left, that means you allocated too much money in the categories, so you will need to make some cuts.
When this happens, it usually means you have been living beyond your income, which is another way of saying you are overspending. When you do this, you will never get ahead financially. By learning how to budget, we can correct this so that you can get out of debt, start saving and eventually reach your financial goals.
If you have to cut back, where do you make cuts and by how much? We will tackle how much first.
We know the total amount of overspending already, we just have to break it into smaller pieces and spread it out. For example, if you are over budget by $200, you can either pick a category and work to reduce that by $200 a month or you can pick 4 categories and reduce each by $50.
When it comes to where to cut expenses, there are some categories that are easier to work with than others. An easy place to start is with food. Stop eating out. When you buy groceries, buy what is on sale.
On the other hand, housing expenses might be difficult to reduce. It isn’t easy to reduce your mortgage or rent. You could shop around for insurance coverage, but other than that, your options are limited.
The key here is to look at everything and be honest with yourself as to what you are willing to cut down on your spending. If you are having a tough time figuring this out, you can check out my post about cutting monthly expenses. You’ll find a ton of ideas to cut spending in all major budget categories.
Here is what my final budget looks like. Note that I only did a handful of expenses in this example. So I am keeping most of the budget categories the same. But I do have money left over because our categories only account for 95% of our income. I put it all this extra money towards savings to beef up my emergency fund.
Step #6: Budget Meetings
Especially in the first couple of months, while you are fine-tuning your budget, you may find yourself needing an emergency budget meeting in the middle of the month because an expense comes up that you didn’t plan for. Or you don’t have the money in the budget to cover it because it is more expensive than you thought, such as a car repair.
The meeting could be just you and your budget if you are on your own. But if you are in a relationship, it should be you and your spouse with the budget even if one of you creates the budget and the other just signs off at the start.
The goal of the meeting is to discuss the expense and to find the money necessary to cover the expense in the budget while keeping the net at zero. This means the household agrees to make whatever cuts are necessary in other categories to make sure the category that needs the money has the money to cover the expense.
For example, let’s say you budgeted $200 for car repairs this month, but the estimates you got to repair your car are actually $350. In your budget meeting, you will discuss raising the “car repair” category by $150 to cover the repair, and you will both sign off on any adjustments in other categories to find $150 for that category.
Let’s say you agree to not go out to eat for a month, and that frees up $75. You zero out that category and add that money to the car repair category. Then, you agree that you don’t need to buy clothes this month, and that frees up another $75.
You then move that money into car repair, and re-do your math to make sure that your income and expenses remain equal and your budget nets out at zero. Then you and your budget partner pinky-swear to hold to this budget for the rest of the month.
Step #7: Track And Adjust
Keep track of all your expenses during the month, keeping every receipt and tracking everything on your legal pad as accurately as you can. Then, when you sit down for the second month of your budget, you have a more accurate idea of your spending and you can adjust your second budget around the new data.
I’ve found that what works best for me is to collect receipts on a corner of my desk for a week. Then on the weekend, I sit down for 15 minutes and update our budget. I’ve found doing this really helps me to make budgeting a habit.
When I was waiting until the end of the month, it was overwhelming having to go through a mountain of receipts. So now I do it weekly.
Another thing is that in addition to receipts, I jump online and look at our checking account and credit card. Sometimes we misplace a receipt or never get one. By checking online I find any I might otherwise miss.
Now, with all this said, learning how to budget for the first time will take you some effort to set things up and get to the point where things are working. I understand that you might not want to take the time to start a budget from scratch.
But budgeting is the foundation for helping you to reach your financial goals, so it has to be done. But is there an easier option? Maybe speed up some of the setup and get right into budgeting? After all, if others are budgeting, can’t you just copy their template and make adjustments? Yes you can!
In fact, that is how I started off. I wanted to save some time, so I searched around and found some great excel budget templates. I narrowed down the one that looked like the best fit for me and got started. I still had to make adjustments so it fit my life, but it was great to not have to start from scratch.
To help speed up the process for you, I went ahead and wrote a post with links to my favorite excel budget templates. You can download most for free and edit or modify them to fit your financial life.
Of course, I know not everyone fits into this category of budgeters. Maybe you want something a little more customizable to your liking. Maybe you also want to save time by not having to manually record every single transaction you make. If this is you, then Tiller is a great option.
It works using Google Sheets and it links up to your bank account. It downloads your transactions so all you have to do is add a category label to them. You can set up the sheet with graphs and charts and make it 100% your own. And while it does cost money to use, you can try it out for free for 1 month.
Now, if the work of a spreadsheet scares you but you want to learn how to start budgeting, then you do have other options. A favorite of mine is Personal Capital. Once you link your accounts, it automatically pulls in the transactions and categorizes them. You just verify that the category is correct and if not, make a quick edit.
I like Personal Capital a lot because I can just track a few categories. I know that my mortgage is the same amount each month, so I don’t track it. My issues are eating out, entertainment and hobbies. By tracking these with Personal Capital, I quickly and easily see if I am over budget or not for the month.
There are tons of other great features with Personal Capital too. In a nutshell, you can reach your financial goals when you use this software. I’ve been using it for 3 years now and it has helped improve our finances tremendously. You can read more about all they offer in my review post. Or you can click over and check them out yourself. It’s 100% free and definitely worth trying out.
Still, there are some other options for you as well when it comes to budgeting. A quick rundown includes:
- You Need A Budget: This budgeting software helps you to think about money differently. There is a learning curve to it and it isn’t free, but people who use YNAB swear by it.
- Good Budget: This is from Dave Ramsey. It is based off of the envelope budgeting system. It’s a great way to get started learning how to budget.
- Trim: This is new player in the budgeting field. They help you budget with a twist. They look through and analyze your accounts and help you to cut bills and cancel memberships and subscriptions you no longer use. The best part is they are completely free! You can get started by clicking here.
With these options you should be able to find something that fits your needs. The key is to just pick one that you feel fits you best and get started. The longer you wait, the longer it will take to get your finances in order.
And it’s OK to change. I started out with a manual spreadsheet. It took too much work so I switched to Mint. I didn’t like that because my accounts would never sync. So I tried YNAB and it wasn’t for more. Now I am with Tiller and Personal Capital.
All along the way, I learned more about budgeting and myself and now have something that fits. So don’t get frustrated if you pick something and it doesn’t fit. Understand what you like and dislike and try something else. It is worth the effort.
As I pointed out at the beginning, be patient. By using the percentage guidelines mentioned above, you can adjust your spending to be more in line with the guidelines as necessary, and as you go along, you will become better and better at budgeting and will make fewer adjustments and have fewer budget meetings.
You will have more control over your money and find that you are able to pay off debts more easily and have more money saved than you would if you never had a budget.
You will find that having a budget, having some order and purpose to your spending, will feel like you are getting a raise. And who wouldn’t want that?