Taking control of my finances in my early 20s by learning to budget is one of the best decisions I made thus far in my life.
I did not always have enough money to fund my wants, but with good budgeting, my needs could be met without going into debt. This doesn’t mean that my financial journey has been or is perfect, but I would say that I am in a good place.
Recently, I shared a video over on my Youtube channel in which I talked about how I was able to get one month ahead on my income and expenses. In the comments, I was asked to share tips for beginners wanting to start budgeting to improve their financial situation. This lead to four simple, yet not so easy steps to begin taking control of your finances.
Budgeting for Beginners
Step 1: Calculate Expenses
You cannot manage your income if you do not know where your money is spent. Take one month to track every single dollar you spent, regardless of the medium (cash, credit, gift, etc.). When I say every dollar, I mean down to the cents.
Break this information into major categories that make sense for your life, i.e. food, gas, rent, bills, etc. I use a paper system, but digitally you can use Microsoft Excel, your banking apps, or any of the available budgeting apps (Mint or YNAB) on your phone.
Then compare with six months of bank statements. What trends do you see in your spending? Could you set a monthly allotment based on your typical spending for groceries, gas, dining out, etc.?
Step 2: Calculate income
Many jobs provide a salary, but once taxes and benefits are calculated, each check is smaller. If you have variable income, it is even more important to account for not only how much money is coming in, but the variances in your monthly income throughout the year.
For that same time period, write down how much income you make every month for one to six months. Differentiate between steady income, variable income, and one-time income. Lastly, calculate the total for each month.
Step 3: Create a budget
Now that you know how much money you receive each month, and how much money you spend each month, you are ready to create a budget. Map out your budget on a calendar for one month. On the calendar write:
- Income on the date(s) you will receive the funds
- Fixed expenses (both automated and non-automated)
- Non-fixed expenses (I often place this on the boxes of the calendar that are undated.
Step 4: Account for the rest
Once all of your income and expenses are mapped out, if you have any money left over, decide how to categorize that spending. Account for savings and spending money. It is ok to spend money frivolously as long as your bills are paid and you have saved money for an emergency.
However, to avoid overspending, allocate a certain amount of funds to use as you please (aka fun money). If you have difficulty sticking with the spending constraints you set, break your spending money into even smaller categories like clothes, dining, entertainment, etc.
Remember, you may not have spending money at first, but eventually, as you account for how you are spending, more money will become available in your budget. Begin by prioritizing debt and saving for a rainy day.
Otherwise, spend time with your budget, tweaking it every month to better suit your needs. Need a visual example? Check out my video detailing how I set up my budget and planner for the year here.
Then, you are ready to build a financial plan!
