You may have heard that creating a budget is one of the most important things you can do to get started with managing your money better. And it’s true! But figuring out how to make a budget besides “writing down my expenses and hoping for the best” can seem tricky. Fortunately, you’ll see here that it’s one of the simplest finance steps you can take!
In case this is all new to you, here’s a guide to budgeting tips for beginners.
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But how can I budget when I’m broke?
Even if you make £25,000 a year or £250,000 a year, you must have a budget. A budget is simply a plan for your money. If you don’t make a plan, then your money will leave you.
It doesn’t matter if you make a lot or a little, your money will not work for you, if you don’t tell it where to go.
When you are on a tight budget or a low income, it is especially important to do a budget. You don’t have as much leeway in your spending and a small mistake or emergency could be devastating.
What are advantages of creating a budget?
The benefits of budgeting lie in the act of having a plan. A budget it just a plan for your money. That plan takes the stress and anxiety out of managing your finances.
It switches your financial focus from immediate, short-term, and reactive spending to a long-term frame of mind. Quite simply, it changes your perspective.
Just like you wouldn’t build a house without a blueprint, your money habits will be haphazard and reckless without a road map.
If you feel rather clueless as to where your money goes, drafting a plan for it is the exact thing you need!
Having this plan ensures that you have money for the things you need and want. It will help you create a system to stay out of and pay off debt.
Why is creating a budget so important?
Essentially, there’s no way you can control where your money is going if you have no idea where it’s going.
By tracking your expenses, you’ll easily be able to see where you may be spending more than you thought you were – and, in turn, where you may have to cut back.
This is especially important if you find yourself spending more than you have each month. You should do everything possible to avoid going into debt but if you keep overspending each month, the problem is just getting worse before it can get better.
Budgeting is also great for giving you a concrete financial target.
It’s great if you’ve decided you want to save more or pay off your debt more aggressively, but without an actually achievable goal to aspire for, it’s going to be very difficult for you to meet your objectives.
That is, instead of telling yourself “I want to pay off all of my credit card debt”, having a budget allows you to say “I’m going to pay an extra £500 each month on to my credit card” while planning exactly how to do it.
Now let’s get into the details of creating a budget.
Want to learn about how you can transform your money mindset? So you can live a happier life financially? See the simple guide below:
Set financial goals
Not only do you need to know why you want to start budgeting in the first place, but it’s also very important to think in terms of specific numbers.
How much debt are you hoping to pay off each month? How much money do you want to put aside in your emergency fund? How much will you be saving to go toward your retirement?
You cannot budget with the vague idea that you want to “save up some money”. Focus on numbers and focus on facts.
Want help setting goals? See the simple guide for setting SMART financial goals:
Make sure your goals are realistic
My final tip in defining your budgeting goals is to be realistic. Sure, it’d be great to be able to save £200 a month into your traveling fund or to pay off all your debt in the space of 2 years.
This may not always be possible unless you are willing to switch to an extremely frugal lifestyle. In order to start a budget from scratch, you’ll have to start small. Its small changes done consistently over time that compound into large wins.
Remember, you can always adjust your budget to save more later. Aim to start with realistic goals, and you’ll be well on your way to become a great budgeter!
Evaluate Your Expenses
Unfortunately, most budgets fail because they often don’t reflect realistic or actual spending habits. Once you have identified your goals, the next step in formulating a budget is to identify your income and expenses.
Life is busy. Quite often, it’s easy to lose track of small expenses such as a daily coffee or occasionally eating out. Little by little, these expenses add up and can very quickly derail your budget.
A good place to start is to track your everyday expenses. Spend a few weeks tracking what you spend to identify your spending patterns. Make purchases as you normally would on an everyday basis. You’ll start seeing where you can improve almost immediately.
- Mortgage: £600
- Utilities: £150
- Mobile phone: £40
- Internet: £30
- Car payments: £250
- Car insurance: £80
- Credit card: £40
- Netflix and Spotify: £20
- Groceries: £400
- Restaurants, bars, & fast food: £200
- Clothes: £50
- Miscellaneous (Uber, Starbucks, lotto tickets, convenience store snacks, etc.): £200
- Monthly expenses total: £2060
You can use a variety of methods for entering in your spending (keep reading to learn more), but the important thing is that you do it especially if you elect for a more hands-on approach to budgeting.
Making all purchases on a single bank card can make tracking easier, or you can opt to keep your receipts or utilise an app.
I personally prefer making most purchases on a single card so that I don’t have to hunt down numbers in multiple different locations.
Plus, when I tried keeping receipts it was too easy to lose one, let them pile up to the point of not entering them, etc.
An app like Mint would definitely come in handy in this regard as it links all of your accounts together for a more seamless approach to budgeting.
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Subtract the expenses from your income
If you have money left over that means you are spending less money than you make. Great! You are living below your means and have options. You can adjust your budget by putting leftover income towards lowering debt or straight to your savings.
Ideally you need to be saving money for emergencies, big purchases and your future i.e. retirement. Your savings needs to be a financial priority. You may ask why saving money is so important and to answer your question, it’s because by saving money for large purchases (vacations, houses, etc.) it keeps you from having to go into debt with credit cards, loans, or mortgages.
If you have no money left over or are going into the red that means you are spending more money than you make. This is bad, plain and simple. You are living above your means and getting close to financial destruction. In order to fix this, you should adjust your expenses or find a way to increase your income.
I realise “just make more money” may sound ridiculous but if you are getting yourself into more debt because you are spending unproductively, then you have no choice.
If you are breaking even then you have just enough income to cover your lifestyle and are living within your means. However, you are leaving yourself zero margin for error to cover any emergencies that could occur. As before, your options are to decrease your expenses or increase your income.
Now that you’ve added up your expenses, it’s time to subtract this from your monthly income.
Example: Total income – fixed expenses = variable spending
£2000 – £2060 = -60
Take a look at that total. If yours looks like the example above, you may start to realise your problem.
If your total expenses are more than your monthly income, you’re in the red and need to cut back on your spending.
Spending more than you earn is where many people get into trouble. Let’s fix it!
Determine how to cut expenses
Now comes the real work. If you haven’t been able to save as much as you want, your budget needs to cut back on the expenses you logged over these months of tracking.
It is easy to feel overwhelmed, frustrated, or stressed out at this phase of the process. Don’t give up! You can do it! Your bank account, and your life, will thank you for making the sacrifices you need to get ahead.
Sometimes you may find there are areas where you can easily cut back.
Paying £100+ for cable every month just to watch it once a week? Cut the cable bill or consider alternative options if you can’t give it up altogether.
Want help cutting back on your expense? Then see the simple guide below:
Want some tips on cutting your electricity bill? Then see the post below:
How can I stick to a budget?
Sticking to a budget at first can be hard. Just remember that it takes 90 days to install new habits and sticking to the budget will take some time to get used to.
No one is perfect with sticking to the budget, but don’t use that as an excuse to disregard the budget.
My biggest tips for sticking to the budget is when something comes up that messes up the budget, don’t give up. Just because you made an impulse purchase for £20, don’t throw the budget out the window and go on a shopping spree.
It’s easy to say “well I’ve already screwed up the budget, what does it matter now?”. It does matter, a small mistake is better than several hundred dollars.
- Make visuals of your goals – keep them around for when you are tempted. Put them at your computer, in your wallet, and at work.
- Make sure you are your spouse are on the same page – make sure everyone is working toward the same goals
- Have an accountability partner – if you don’t have a spouse or they aren’t on board, tell a trusted friend what you are doing and why and lean on them for support.
- Get used to the comments – when you are making a lifestyle change, get ready for comments from friends and family about your choices. Not everyone will be supportive of your decisions. When you can’t do something or go out for lunch every day, there will be comments. Don’t let it bother you and explain “it’s not in the budget”.
- Leave money for fun – you won’t be able to stick to the budget if it’s so tight you can’t do anything fun at all. Now I don’t mean parties and concerts every weekend but budget in some fun money. This will help keep you motivated and stick to it.
Budgeting tips for beginners – Final thought
Managing money effectively isn’t all about the amount you make but what you do with it. Money is a resource. Proper management of that resource doesn’t involve a magic formula. Not at all, it simply means getting the most from the money you have. This is why learning how to budget is of crucial importance.
A good budget will protect you from going into debt and relying on credit for everyday living expenses. This is not to suggest that credit (e.g. loans) is bad. They have their uses and can accelerate your income to allow for investments in assets.
At its core, a budget should be simple and easy to use, while reflecting current realities, including alignment with future goals.
Do you have any tips to create a budget?
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Hello! My name is Adam and welcome to my space on the internet. Here you can find me writing about topics such as lifestyle, self-care, self-development, finance, saving money and making money. Come and join the community!