How to Budget in 5 Easy Steps

What is budgeting and how do you start?

If you are looking for practical and effective ways to take control of your personal finances, learning how to budget is a great place to start. Budgeting is a powerful financial practice that you can utilize to manage your money and reach your financial goals. Budgeting, by definition, is a financial plan that helps you determine how you will spend your money for a specific period of time, typically a month. A budget involves tracking your income and expenses in order to ensure that your money goes towards achieving your financial goals.

To successfully build a budget, you will need to follow these five key steps. Figure out your financial position, track your expenses, set clear and realistic financial goals, choose the right budgeting strategy, and stay disciplined and committed. If you are looking for guidance on how to budget for beginners, this guide will take you through each of these 5 easy steps so you can get started with confidence!

1. Figure out your financial standing

Understanding your full personal financial picture is a crucial first step when learning how to budget. In order to do this, you need to understand exactly how much income you have coming in each month. This includes your monthly paycheck but can also include other income sources such as investment income or side hustles.

Next, you need to evaluate your debt. How much debt do you have? What kind of debt is it? This includes all debt, which can range from credit card debt, student loans, a mortgage, or any and all other financial obligations you may have. You also need to gather all the details of the debt as well. It is important that you know the specifics, such as the principle amounts, the interest rates, how much have you paid off, and the remaining balances that you have left. Figuring out every detail of your debt will help you create an effective and successful budget.

2. Track your spending

Tracking your spending is essential for understanding where your money is going every month. In simple terms, this means you need to figure out how much money you spend every month and what it is that you are spending it on. Identify your monthly expenses, such as your housing or rent, groceries or dining out, clothing expenses, entertainment, and any other discretionary spending.

To get an accurate picture of your spending habits, you can review all your bank statements, credit card statements, receipts, and anything else that will give you an accurate picture on what you are spending. Most people have no idea how much they actually spend every month. They really underestimate those small but frequent purchases they make here and there – these add up quick!

Categorizing

Once you have clear view of how much money you are spending each month, you can start categorizing these expenses. The first two main categories to utilize are your needs and your wants. Your needs include essentials such as your rent, groceries and insurance. While your wants might include things like entertainment, dining out, or clothing. It is up to you to decide the difference between your needs and wants, but it is important to be honest with yourself. You might feel like you need to buy that coffee every morning, but that is not an essential to living.

Now that you have figured out the difference in your needs and wants. You can further break them down into more specific categories. These smaller categories will include things such as utilities, transportation, insurance, travel, and clothing. This will also help you to identify some of the different areas where you can cut back.

Understanding how to budget helps you to be mindful of how your income is being spent every month. By reviewing your spending patterns and tracking your expenses, you can adjust your spending and financial habits in order to allocate your money more effectively and help you to reach your goals!

3. Figure out your financial goals

Knowing your financial goals is a must if you want to be successful in budgeting. It is important to have a clear ‘why’ when you are wanting to start budgeting. This will keep you disciplined and motivated to help keep you going.

What is your financial goal? Do you want to save money for a down payment on a house or fund your dream vacation. Maybe you want to pay off all of your debt or start investing more money each month. Your goals should be unique to you. It is important that you make these specific and measurable.

To do this you should ask yourself:

• What is the exact financial goal?
  • “I want to save money for a down payment on a house”.
• How much money do I need to achieve this goal?
  • “I need to save $25,000 for this goal”.
• What is the timeline for reaching this goal?
  • “A year from today”.

“I want to save $25,000 for a down payment on a house a year from today”.

All these questions need to be answered when deciding your ‘why’. A great tip is to write down your goals! In fact, studies show that you are 42% more likely to accomplish a goal, simply by writing it down. If you want to go even further, you can place your written goals somewhere that you will see them everyday. This could be your refrigerator or bathroom mirror. It will serve as a daily reminder to you on why you are doing this, keep you motivated, and will help you to stay on track.

4. Choose a budgeting method

At this point, you know how much income you have and what your expenses are. You also have a clear vision of where you want to be as you have written down your financial goals. Now, it is time to pick a budgeting method that will best fit all of these factors that are unique to you. There are hundreds of budgeting strategies out there to choose from. Some of the most popular include:

• Pay Yourself First: This strategy prioritizes savings and investments before paying for any of your other expenses.
• Zero Based Budgeting: Using this method, you assign every dollar a purpose in order to help decrease your expenses each month.
• 50/30/20 Rule: In this method you will allocate 50% of your monthly income to your needs, 30% to your wants, and 20% to your savings, investments, or possibly debt repayment.

When researching different budgeting methods or strategies, it can get a bit overwhelming with all the options that are out there. If you are learning how to budget for beginners, starting with the simpler methods can make the process easier. It is important to keep in mind what your financial goals and priorities are. This will help you narrow down the options and select the approach that best aligns with your needs and goals!

5. Stick to it!

You have figured out your income and expenses, your financial goals, and which budgeting strategy you are going to utilize. Now, it is time to get to work! Most of the time, the hardest part of budgeting is sticking to it and staying disciplined. This is where your ‘why’ will come in. Keeping your goal (or goals) at the front of your mind will help you to stay consistent with your budget.

Another way to help stick to your monthly budget is turning it into a fun challenge or game for yourself! If you only have $50 to spend on entertainment this month, try and see how many activities you can find that are cheap or even free! Maybe you already spent your food budget for the month, but you still have a week before it restarts. It is time get creative and try new recipes! Use up all those leftovers in your fridge and the pantry items that you forgot about.

Another way to stay disciplined with your budget is to tell people about it. This can be anyone – your friends, family, or coworkers. Tell them that you are on a budget and your goal that you are trying to achieve from it. This will help to keep you accountable. They will ask you about your progress as well as give you a little extra motivation to keep going.

No matter which budgeting method you choose, the most important thing is to be disciplined and that you stick to it. It will be difficult at first. Keeping to a budget requires new habits to be built and old ones to be broken. However, as you see your savings account grow and your debt shrink, budgeting becomes an exciting and rewarding process!

Conclusion

Learning how to budget is an essential financial skill that will empower you to take control of your personal finances and reduce your financial stress. These 5 steps – understanding your financial position, tracking your expenses, setting clear financial goals, choosing the right budgeting strategy, and staying disciplined and committed. By following these, you can create a budget that works for you! Whether you are figuring out how to budget for a month or looking for tips on how to budget for beginners, consistency and discipline are the key to success. Start today and take your first step toward financial freedom!