Review these four easy steps to start a budget. Each step will help you understand the purpose of your financial goal and the steps to get there.
Beginning a budget can seem like an overwhelming task if you have never done one before. Knowing where to start or what to do can be daunting, especially if you have lingering debt hanging over your shoulders.
Review these four easy steps to make beginning a budget a breeze. By following these steps, you will be well on your way to both financial freedom and reaching your financial goals!
In this article, we will cover:
- What is a budget?
- Setting a financial goal
- Where to start
- Categories – breaking it all down
- Monthly financial meeting
What is a budget?
A budget is an outline of where money is coming and going. It is a useful tool to help you reach your goals by keeping track of both income and expenses. It can be used as a guide to “control” where money is going and can help encourage stopping and thinking before spending.
Setting a financial goal
If you have read any of my other budgeting articles like how we saved over $3,000 during a no spend month, you may remember the importance of having a why. This is the reason behind a setting a financial goal. When beginning a budget, it is crucial to start with mindset.
Ask yourself these two questions:
- Why do I want to start a budget?
- What do I have to lose by creating a budget?
A goal can vary per person and per family. Maybe it is paying off lingering debt, whether it be from student loans or credit cards. Or maybe it is a simple as saving up for a new puppy or future baby. Perhaps it is even building an emergency fund to have have peace should something happen- like an unexpected medical bill or a leaky roof.
Once you have this goal, or reason why you are beginning a budget, it is time to start the process of creating a budget.
Remember, at the beginning of each month, revisit your goal and reason for beginning your budget. You can adjust this goal as often as you would like. This goal should help to keep you on track and remind you why it is important to start on a financial journey. Also, a goal can be mutual for two people or completed for each individual.
Just remember, if you are beginning a budget to get out of debt, every penny you make will go towards chipping away at what you owe. This means, after your fixed expenses, all money will contribute to paying down your debt.
Where to start
To make the process of beginning a budget less intimidating, start with bank statements and a budget platform (either a sheet or an online app). Begin by printing out your last three months of bank statements and review for fixed expenses, income and trends/categories money is being spent.
The only items not accounted for on these bank statements would be any cash payments or money spent/transferred via a program like PayPal or Venmo (unless connected directly to a bank account).
Commit to one month of tracking every purchase. Be diligent on doing so. After something is purchased, immediately track it. If you wait until the end of the week to track receipts, it can be a slippery slope to go over the budget because each purchase is not categorized right away.
Just remember, if you are beginning a budget to get out of debt, every penny you make will go towards chipping away at what you owe. This means, after your fixed expenses, all money will contribute to paying down your debt.
Categories – breaking it all down
When starting a budget, categories can be a great way to ensure each dollar has a purpose and place. Overarching categories include spend, give or save.
Reviewing a bank statement as an outline makes it easy to see where money trends are. These can be broken into three to four sections: income, essential/fixed expenses, annual expenses and flexible expenses. To start, it is a rough estimate on what you think you will earn and where you will spend (or save) the money.
List income to the best of your ability. If you have flexible income or earn additional commission, count it as “zero”.
For example, rent/mortgage, electricity/gas, groceries, and cable/wifi may all be essential items which are used each month. This list should ask so include minimal payments on any debt. Flexible expenses may include take out/dining out, date nights and any category which does not have a set expense.
Fixed expenses are expenses that will not change month to month. For example, a subscription, membership, or a routine bill with a flat rate (like a water bill, cable bill or a mortgage).
Annual expenses are expenses which occur one time per year. Sometimes annual expenses can be a cost savings. For example, paying for a year of insurance in advance. Other fees can be a one time fee for membership renewal- like Amazon Prime. Or this could also be funds for a children’s birthday party (on a budget).
Consider having a blow fund. When having a budget, a blow fund allows for a little flexibility. Maybe it is important to have one extra meal out with friends or there was a great deal on a shirt which was on clearance.
A blow fund can be used in addition to a category or item which has met the budgeted amount early in the month. Plus, for couples, it is typically an item that does not need to be “approved” by another and should have no guilt attached to it.
For example, my husband and I both enjoy reading books. Sometimes this fund goes towards a book and other times it goes towards my makeup that just ran out unexpectedly (because my toddler threw it on the floor when she decided to play dress up..)
Monthly financial meeting
Once the first month of tracking concludes, consider holding a finance meeting. My husband and I make it a monthly date on our calendar. We grab coffee and donuts while reviewing our monetary goals together. We have also split a few glasses of wine once our little one is down. Keep the meeting routine and low pressure.
First, discuss adjustments within the budget. See which categories had overages and underages. Explore what expenses surprised you and reassess categories as needed.
After reviewing the budget, consider if you need to adjust your initial goal and debts need to be. Additionally, consider meeting financial goals faster by completing a no spend month challenge.
Do you have any tips for someone who is starting a budget? Comment below to share your favorite tips and tricks!
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