To a beginner starting a budget feels overwhelming and difficult. Anyone who has never given it a second thought to budgeting might not know where to start.
It does not have to be like that of course. Budgeting is simply carving out a plan for your money in the medium- and long-term future. It is plotting out the direction you want to go in your financial life.
In many cases, it is a valuable tool to correct the mistakes of the past. Call it what you want, a plan, a road map, budgeting makes your life easier. It does not have to be intimidating and it is not.
That said, there is a right and a wrong way to plan out a budget. With these budget tips for beginner’s guide, I hope to point you in the right direction. So here you go, here are some budget tips for beginners.
Setting Your Goals
Budgeting starts with goal setting. What are the goals for your budget? What outcomes do you want? What is the reason you want to have a budget in the first place?
When setting your goals, you need to apply some principles This is especially true with money. You need to use the SMART acronym. That is your goals need to be specific, measurable, achievable, relevant and time bound. Once you stay within these parameters, you will not go far wrong.
Make a list of the financial goals you want to achieve, then check they fall within these guidelines. If they, do not you may need to discard them for now at least, or revise them.
Examples of financial goals for your budget could include paying off your debts, saving to buy a home, saving for a vacation, retirement or simply keeping a track of your spending. Every person has a different reason to start budgeting. But whatever your reason, knowing your why will be the first motivational step to sticking to your budget.
Beginner Steps
It is best to set a budget for each month. That way you can see trends in your spending throughout the year. It also gives you a visual graph of seasonal spending such as summer vacations or Christmas.
The first thing you need to do is to prepare your budget. Start by noting down your income. If you are self-employed, write down your total net earnings from last year and divide by twelve to get an average monthly figure.
Next you need to track your spending for the first month. You could do this by simply keeping a daily record for the month. A small notebook is ideal for this. Or if you are tech savvy, you could use a spreadsheet such as google sheets or excel. There also excellent budgeting apps on iPhone or android.
At the end of month, record your income and expenses on a A4 sheet of paper or spreadsheet. Remember to place both your income and expense into categories. Examples of categories are outlined in this earlier article on monthly budgets. However, feel free to include your own categories if you wish.
Budget Tips
Like I said earlier, budgeting does not have to be difficult, but you need to be disciplined and have a plan to put it together. Here are some tips to make your life easier.
- Set up two separate columns for fixed and variable expenses. This will give you a better idea of your outgoings each month, or whatever expenses you can expect to come up. Your fixed expenses should include electricity, gas, and mortgage payments. Your variable expense could be eating out, TV licence etc.
- Set up an emergency fund. This is vital for unexpected events like a leaking roof or your car breaking down. Open a separate bank account for this. This will avoid the need to dive into your main savings account and as a result running out of cash at the end of the month. Put aside at least 10% of your monthly income for this. Aim to have from three to six months expenses in your fund. Do not at any stage use this fund for anything other than emergencies.
- Always review your budget. Your financial situation is always changing. You may need to make readjustments. Your income may increase or decrease for example, and you will need to reassess your expenses to reflect this.
- Any money left over at the end of the month should always be put towards the goals you have set out for yourself like clearing your debt or saving to buy a house. If you have extra cash, it should not be spent frivolously. Of course, you can always make exceptions like at Christmas or your birthday for example, but do not make this a habit. Discipline is the key to good budgeting
The 50 30 20 Rule
One favoured method you can use with your budget is the 50/30/20 rule. This suggests dividing your budget into three main categories, needs, wants and the remainder towards your savings or paying down debt. This rule was popularised by US Senator Elizabeth Warren.
This means 50% of your income should be allocated to your needs. That is your rent or mortgage payments, health insurance, groceries, and utilities such as electricity and water.
The next 30% can be allocated to wants. Non necessary spending such as vacations dining out and entertainment.
The remaining 20% should be allocated to paying down debt or towards your savings. You could also put this money towards an emergency fund.
This rule is not written in stone and should be adapted to your personal circumstances. It can take also be open to interpretation which expenses are necessary or not.
However, many people have no idea how much they are spending on unnecessary items and how little they are putting into their savings that the 50 30 20 rule of thumb would be a valuable tool to employ.
The Cash Envelope System
The cash envelope system is another good budgeting tool for beginners. This system involves allocating a specific amount of cash to a spending category and sticking to it.
You start by calculating your income and then divide the amount of money you have available to spend until the next pay day into categories using envelopes.
It is up to decide what categories you want to put your envelopes into. Suggestions could be groceries, entertainment, or motor expenses.
You then allocate a specific amount of cash to each envelope. For example, you put €200 into an envelope marked groceries.
This requires a lot of discipline because if you reach your spending limit in a certain category, which is it, no more spending in that category until the next pay day
If you do overspend in a category by, say $5 or $10 you need to put it back, get it from somewhere else. Which means you will have to spend $5 or $10 less in another category to make up for it.
This system makes it extremely hard to overspend if you keep to it. But the key is keeping to it and that is where the self-discipline becomes necessary.
Overall budgeting can be tricky but only if you do not do it right. But it not an impossible task. It requires good planning and determination.
But the sooner you start the sooner you will master your finances. Do you agree? Let me know what you think in the comments.
