Of all the good financial habits to practice, using a budget is one that can immediately change your life. Over the past few years, more and more Americans are beginning to use budgets to manage their money. This article will give you some budgeting tips for beginners that will get you started on the right path!
Why Do I Need a Budget?
For many people, budgeting seems like a process that only restricts their spending and leaves no room to be financially nimble. The truth is, a well-managed budget helps you not only handle today’s bills but also prepares you for the challenges that you can’t see coming.
What Is a Budget?
A budget is a spending plan for your money. A budget based on your income and expenditures will help you create and meet your financial goals.
How To Build a Personal Budget
You don’t need a certified financial education instructor to teach you how to create a budget. When you break it down, a budget is a list of different places where you need to put your money.
The first step in building a budget is understanding your income and expenses. Many online tools can help you with this process, but the most important thing for you is to be realistic about what you have coming in and going out.
To build your budget and set budgeting goals, you first need to figure out how much money you make. Gather all your pay stubs, bank statements, and other documents that report your monthly income. Add them all up to get your net income, or “take-home pay.”
Identify Your Expenses
After totaling your net income, list your various monthly bills. Your expenses will fall into two major categories—fixed and variable.
Fixed expenses are your rent, student loans, or car payments. These are the bills that are the same each month. Variable expenses can be different amounts each month. Bills like these are usually based on your activity, like credit cards, groceries, and utilities.
Budgets don’t just cover your bills! Make sure you create categories for other things you put money into, like entertainment, charitable contributions, or savings and investments. To see your total monthly spending, combine all of your spending categories. If this number is greater than what you’re taking home in pay each month, think about where you can cut back or spend a little less.
Budgeting Tips for Saving Money
As you can see, building a budget is not difficult in theory. The trick is learning how to stick to it.
It’s normal for any beginning budgeter to feel a little lost on this kind of financial journey. Here are some tips that will create a solid foundation for good money management to get started.
#1. Save Money (Of Course)
A savings account holds the money you don’t need right away. You don’t use your savings for any other expenses. Instead, the money you save should sit for as long as it can so that it can grow in an interest-bearing account.
When you have savings, you can use your cash reserve to make a down payment on a big purchase or supplement any decrease in your income. Because credit cards and loans make it easier to spend money without understanding their actual cost, savings can help you avoid creating more debt.
You can open an account for savings at your bank, credit union, or with an online provider. Interest rates can vary a lot, so be sure to weigh the pros and cons of any savings account before you decide on one.
Pay Yourself First
Putting aside some money before paying your bills is called “paying yourself first.” It’s a meaningful way to save for the future and stop you from putting off other financial goals.
Your savings goals don’t need to be significant at first. Even just a few dollars would be a great way to plan now for your future self and thank yourself now for the hard work you’re doing now.
#2. Pay More Than the Minimum Due
When you organize your budget, you may discover some bills that don’t require you to pay the entire balance every month. Instead, you can make a “minimum payment” that covers a portion of the debt.
Although minimum payments allow you to keep your account current and avoid penalties, a minimum payment does little for your debt repayment plans. A minimum payment typically covers the interest compounded over the month but leaves the principal amount largely untouched. If you regularly make minimum payments on an account, you’ll notice that your balance decreases slowly. Sticking with tiny payments means that you’ll pay more interest over time and make your loan more expensive.
Instead of using your lender’s minimum payment option, set a minimum that’s larger than that amount. This tactic is one of the best budgeting tips for managing a credit card wisely because it helps you avoid staggering balances that you may never be able to pay fully.
Many people in financial trouble resist this tactic because it seems to take away the little wiggle room they have to make a given month’s budget work. But with any debt that accrues interest and fees, the best budgeting move is to pay it down quickly.
#3. Build an Emergency Fund for Unexpected Expenses
A well-planned budget should always include a designated emergency fund. This fund will help you manage irregular expenses—like an unexpected car repair or a broken water heater—without having to resort to your credit cards, loans, or your savings account.
How Much Money Should You Put In an Emergency Fund?
Many financial experts recommend having an emergency fund of three to six months of living expenses if the unexpected happens. That is a significant amount for just about anyone, so if you’re just starting your fund, set your first personal goal between $500 – $1,000.
#4. Live Below Your Means
Spending money doesn’t always mean you have to spend all of your money. Your budgeting process should include regular reviews of your expenses and how you can decrease them.
Here are some budgeting tips to help you spend less: There are many unavoidable bills in life, but your budget can help you save in some key areas. If you’re spending more money than you are making, try some of these budget hacks to balance your budget.
Buy One Streaming Service at a Time
You can get hours of entertainment for a small monthly fee with subscriptions plans, but be careful not to overspend by signing up for too many services. If you like variety, subscribe to a streaming service per month. Cancel your current subscription at the end of each month and get a new one. You can not only watch what you want, but you may also be able to catch introductory offers for reduced or free rates that will make your experience even better.
Bundle Your Services
Why have two bills for services like phone and Internet, when you can have just one? Bundling—getting multiple services from the same provider—can save you hundreds of dollars. When you can decrease spending in one area like this, you can use that newfound “extra” in other areas of your monthly budget.
Lower Your Monthly Payments
When you get an installment loan—such as a bad credit loan—it is usually a long-term debt with a fixed monthly payment. But a considerable decrease in your income can change your budget and make a manageable bill a new burden.
Talk to your lenders about getting your installment payments lowered. For example, many borrowers renegotiate auto loans for lower interest rates and longer loan terms. If your account is current, your credit card company may also be willing to work with you to accept lower payments.
However, it’s important to note that smaller monthly payments will most likely mean paying over a more extended time, which will affect how much interest you will pay. But if the change to your income is long-term or permanent, this move will help you make other less-negotiable areas of your budget (like food and transportation) work.
Alternative Budgeting Strategies
Even with the budgeting tips for beginners discussed here, creating a realistic budget can still be tricky.
When you’re starting anything new—especially a financial plan—you may find that you need a model to follow to start getting your financial life on track. Here are a couple of budgeting strategies that help organize spending in a budget.
The Zero-Based Budget
A zero-based budget is a management tool designed to ensure that you spend every dollar you make to achieve your financial goal. The idea is to start with an empty budget and then determine what you need to pay with your income.
You start with predetermined expense figures with traditional budgeting and then allocate money across your spending categories. On the other hand, a zero-sum budget puts every dollar of your income “to work” in any one of your budget categories.
How a Zero-Based Budget Works
To understand zero-based budgeting, let’s take a look at a simple example. Suppose you make $4,000 a month. You then fill your budget categories until you’ve spent all $4,000. You repeat the process with the next month’s budget.
This approach allows you to see how much you can spend in each category, not just how you are supposed to spend. It is designed to force you to think about your needs and prioritize them with your contributions. Over time, a simple zero-sum budget can even out your financial strain. Since you’re putting all of your money into categories, you will eventually have surpluses to move funds as needed to other categories or savings that can cover your needs.
The 50/30/20 Budget Rule
When saving more money, many try to get more self-disciplined by cutting out their favorite things. Yet, what would happen if you instead put a bit more of your effort into some easy changes that could cause you to save enough money every month to buy all the luxuries you currently cut back on? Sounds crazy, right? It’s not. This strategy is known as the 50 30 20 rule.
How the 50/30/20 Rule Works
The 50/30/20 rule is a guideline for financial planning that suggests spending 50% of your income on needs, 30% on wants, and 20% on savings.
The most significant portion of your income—50%—goes to the essentials and bills you have to pay. These bills will be a mix of both fixed and variable expenses, like rent, utilities, insurance premiums, and loan or credit card debt.
Next, 30% of your money goes towards things that make your life more fun, like a new gaming system, concert tickets, or a weekend trip. Putting fun money in your monthly budget is essential for relaxation and well-being, no matter your financial situation.
The remaining 20% of your income can go towards a couple of different things. You can either contribute more to your debt or put it into savings. Either choice will provide a positive outcome— reducing or eliminating the need for you to take on more debt in the future.
The 50-30-20 budget rule is a reliable way for beginning budgeters to prioritize their spending. With a simple, monthly overview of your expenditures, you can avoid going over budget and save money for the future without trying to keep track of every transaction.
There are many budgeting tips for beginners that address specific needs and financial goals. Starting with the four that we discussed here will help you build good financial habits that will make budgeting hacks like these easy to fold into your life.
Budgeting can seem like a daunting task, but it can give you the clarity and confidence you need to make the most of your money. By understanding your spending habits and using a few budget and money-saving hacks like these to improve them, you can manage your way to realizing your financial goals.
And if you need more personal finance tips like budgeting with a low income, or single mom budgeting, check out the CreditNinja Dojo for more!