This “Budgeting for Dummies” article will help you learn to budget quickly and easily. And don’t be offended by the “dummies” term. Why?
Just because you don’t know something, it doesn’t mean you’re dumb! After all, you can’t know what you haven’t learned.
So you might not know about budgeting. But we’re going to take care of that. I can promise that if you make and use your budget, it will give you power over your money. And you’ll become budget savvy.
Table of Contents
- What is Budgeting and Why is it Important?
- How to Create a Budget that Works for You
- A Word About Spend Tracking
What is Budgeting and Why is it Important?
Let’s start by talking about what a budget is. Simply put, a budget is a plan for your money. You plan your day, scheduling the activities and tasks you need to do, right? With a budget, you can plan your money as well.
Does the word “budgeting” bring up negative thoughts in your mind? Or are you a bit intimidated at the thought of creating and living by a budget?
There’s no judgment here. I used to feel the same way.
When I read about or thought about budgeting, I’d get this knot in my stomach. I’d have visions of living on rice and beans for the rest of my life.
Then I learned the real reasons why budgeting is so important. And I learned how to live using a simple budget that made my life easier and happier.
Now my budget and I are BFFs. I love that thing and visit it several times a month. If you don’t know the reason, it may be that there are a few secrets to budgeting you’re not aware of yet.
Knowing those secrets might help you to love living by one too.
There are several reasons why a budget is important. And dare I say, it can even be fun!
Let me tell you how a budget has changed my financial life. Also, I’ll share how living with a budget can change your life as well.
1. Budgeting Puts You in Control of Your Money
Okay, this is my absolute favorite part of budgeting – and no, I’m not a control freak. ???? I used to view budgets as a path to losing control – control over what I could buy and when I could buy it.
But in fact, budgeting is the one tool that puts you in total control over your money. Here’s why.
When you create a budget, you get to decide how you will spend each dollar of your income. Have you heard the term “give each dollar a job?” Budgeting helps you assign each dollar of your income a job every single month.
You might assign $900 of your money toward rent. Or you’ll assign $300 of your money toward optional spending on entertainment. The choice about which jobs you assign each dollar of your income belongs completely to you.
I realized that creating a budget every month helped me be in control of my spending. So my fear of budgeting started to dissipate. I liked the idea of being in control of where my money went.
Before budgeting, it seemed to me that my money simply disappeared. I never had any money, but I didn’t understand why.
When I wrote my income and bills down on paper, it seemed that I should have enough to go around. However, I was always short at the end of the month.
It wasn’t until I started making a plan for my money each month that I could seal up that black hole of spending. It used to suck all of my extra funds into a disappearing funnel, never to be seen again.
Now I know where each dollar goes every month, and it goes where I tell it to.
2. Budgeting Identifies Overspending
Which brings me to my next point. Budgeting is a rockstar solution to overspending. When you budget, you get a clear view of how much money you have coming in each month. Therefore, you can better determine how that money goes out each month.
Before I started budgeting, I would simply spend as I saw fit. The biggest problem with this….ummm.. tactic… is that I was spending more than I made every month. In the process of this non-plan, I was getting deeper in debt too.
And I couldn’t figure out why. I thought the problem was my income – that I didn’t earn enough. However, in reality, the problem was that I was overspending and didn’t know it.
When you create a budget that determines where each of your dollars go every month, this will stop. You can discover and conquer any overspending patterns.
In my case, a large part of my overspending was going toward drive-thru runs and eating out. Mind you; I didn’t plan for these excursions for the enjoyment of time with family and friends.
Instead, they were those impromptu little trips to the fast food drive-thru and buying the big box store snack bar, etc. They added up to big money over the course of each month, mostly because they almost all involved my four kids.
Once you start budgeting, you can do like I did and set specific dollar amounts for those types of expenditures.
That way you are spending what you want to be spending in each area. Not spending more than you want to be spending.
3. Budgeting Helps You Prioritize Your Spending
This brings up another great benefit of budgeting. Budgeting is a great way to help you prioritize your spending. When I realized how much money I was spending on snack bar trips and drive-thru runs, I had to ask myself a question:
Is the amount of money I’m spending each month on this stuff worth the time it takes me to earn it?
The answer was a clear “no,” and that made me re-think those expenditures. I cut way back on spending in that area.
Budgeting helped me to discover which expenses were important to me, and which were not. This is a crucial step if you want to have your money work for you in a way that brings you peace and joy.
As you make your budget each month, ask yourself one simple question: How important is this expense to me?
If it’s worth it, keep the expense. If it’s not, find a way to reduce or eliminate it. That way you can spend that money on something that has a bigger priority in your life.
This is called value-based spending. Value-based spending helps ensure you’re spending your money on the things that matter most to you.
And budgeting is a great way to help you implement a value-based spending program.
4. Budgeting Helps You Reach Your Financial Goals
What other added benefit will a value-based spending program bring to your life? Well, combined with your budget it will help you reach your financial goals.
Just a question: have you ever given some thought to what your financial goals are? If so, great!! Then you’ve probably already reaped the benefits of identifying your financial goals.
If not, you’re missing out, my friend. Benjamin Franklin once said:
“If you fail to plan, you are planning to fail.”
That quote speaks volumes to me. And it certainly rings true in the personal finance arena.
Write Down Your Goals
Writing down your goals is shown to increase your chances of meeting them exponentially. Check out this article by Forbes for more info on that.
Once you’ve determined what your financial goals are – and written them down – you can use your budget to help you reach those goals.
For instance, let’s say you want to save $25,000 as a down payment on a house in the next five years. All you have to do to reach that goal is to create a budget.
Make sure it allows you to put $417 a month into a savings account targeted toward your house down payment. Then continue to do so for the next 60 months. See how that works?
With each financial goal you have, you can do the same thing. Just work those numbers into your monthly budget. It might require that you reduce spending in other areas. However, you’ll be okay with that if you’re using a value-based spending program.
As an example, let’s say you’re spending $120 a month on a cable TV subscription. You might decide that is not as important to you as your goal to pay cash for a new-to-you car.
So, you cancel your cable subscription. Then you use your budget to re-route that $120 a month to your new car savings fund.
This will help you to prioritize your spending and reach your financial goals faster.
5. Budgeting Gives You Peace of Mind
So many aspects of budgeting can be truly life-changing. But one of my personal favorites is the incredible peace of mind that budgeting can bring.
Since I began budgeting over five years ago, the peace of mind I have is increasing every month. The more in control I am over my money, the closer I get to my financial goals and the more at peace I feel.
Before I started budgeting I worried about money constantly – on nearly a daily basis. Now that fear is largely gone thanks to the fact that I implement a solid plan every month for my money.
If you crave peace of mind about your finances, I strongly encourage you to start budgeting. I’m convinced that your budget will help you just as much as mine helps me.
Now let’s talk about how to create a budget.
How to Create a Budget that Works for You
I’ve already shown you why creating a budget is important. However, creating a budget that works for you is equally important. There’s no one-size-fits-all budget.
Your budget has to be specific to your financial goals and your lifestyle. Here’s how you can create a tailor-made budget that will work for you if you use it.
Yet budgeting doesn’t have to be overwhelming. In fact, Well Kept Wallet has a great starter budget form that can help you create your first budget.
Or you can create your personalized budget on a simple Excel spreadsheet. You might even prefer to use a notebook as I do.
Tip: Make it even easier to pull your expenses into a spreadsheet automatically with Tiller! Try it free for 30-days!
1. Start by Determining Your Financial Goals
This is a very important step – especially if you share finances with a spouse. Note that I strongly suggest budgeting be done together if you do have a spouse or partner. Grab your spouse by the hand and sit down. Create a list of financial goals.
Note that it might take some discussion to come up with a unified list if you are budgeting with a spouse. I suggest making a list of three goals:
- short-term goals (can be accomplished in 1 year or less)
- medium-term goals (can be accomplished in 1 to five years)
- long-term goals (will take over five years to accomplish)
For instance, you might have a short-term goal of paying off a $2,000 loan within the year. Plus, a medium-term goal of saving to purchase a car within three years. And a long-term goal to retire early in ten years.
Goals are essential to budgets because they help you spend your money in the way that’s most important to you. Remember, value-based spending is nothing more than spending your money in the way that brings you the most value.
Maybe you want a paid-for house, get rid of your consumer debt once and for all or achieve financial independence. In short, a budget can help you get there.
After you establish your goals, you’ll create your zero-sum budget.
2. Write Down Your Income and Expenses to Create a Zero- Sum Budget
Your first step will be to write down your entire monthly income. You can write down your gross income and then list taxes and other deductions as expenses.
Or you can list your net income and not list deductions as expenses. Some like to use gross income to have a clear idea of what they’re spending on medical insurance, 401k deposits, etc.
After you’ve determined your income, make a list of your expenses. Start by writing down the ones you’re sure of such as rent, debt payments, etc. You may need to estimate when you move on to fluid expenses such as groceries, gas, fun money, etc.
Don’t forget occasional expenses such as gifts, clothing, car repairs, annual car insurance, etc. Take those expenses as an annual and divide by 12 to include in your budget.
Now, subtract your expenses from your income. If your expenses outweigh your income, you’ll have to cut costs or find a way to increase your income. If you have money left over, put the money as a line item toward financial goals you have.
For example, you might want to put some toward extra debt payoff, more in savings, some toward vacations, etc. Use your goals list to determine how you can achieve your goals faster with the money you have left over.
Budgeting in a way that gives every dollar a job is called zero-sum budgeting. Zero-sum budgeting is an effective way to make the best use of all of your income.
3. Implement Your Budget
Now that you’ve made a budget, you’ve got to be intentional about using it. There are several ways to do this. You can use a simple Excel spreadsheet and track everything. Ensure you don’t go over your designated amounts as you spend.
There are also free online tools that can help you budget. Personal Capital is a comprehensive free tool. It helps you budget, track expenses and monitors your net worth all in one place.
YNAB (You Need a Budget) is another great budgeting tool. Its goal is to help you save more and pay off debt. YNAB does cost $7 a month, but it’s a great budgeting tool.
Remember that you have to use your budget to reap the benefits of it. This might take some practice, but it’ll be worth your efforts.
4. Tweak Your Budget
During the first few months of using your budget, you may find you need to tweak or modify it. Expenses in some areas may be higher or lower than expected. Or you might have forgotten about an area.
Check out this article on budget categories and recommended spending percentages to help you budget.
5. Review Your Budget
It’s also important to review your budget regularly. See what’s working for you and what’s not. Then change it up. Work to ensure your spending plan is helping you achieve your financial goals.
Look for any non-value based purchases and talk about how to eliminate them. This article on the Challenge Everything Budget will help you get the most benefits out of your budget.
By following the above steps, you should be a pro at budgeting in no time.
A Word About Spend Tracking
I can’t talk about budgeting without talking about spend tracking. This sister to budgeting involves writing down each dollar you spend into specific categories. For example, you’ll have a category for groceries, entertainment, transportation, housing, clothing, gifts, etc.
How will spend tracking help you? It gives you a clear, real-time picture of where all of your money is going. Plus, you can see how much you’ve spent during the month. That way you can make changes to your spending quickly if you’re spending more in a given area than you want to.
For instance, let’s say you’ve budgeted $200 a month for entertainment expenses. By the 20th of the month, you look at your spend tracking sheet and see that you’ve already spent $197 on entertainment. Then you know right now that you have exactly $3 left to spend. You’ll know you need to start planning some at-home fun or other free activities for the remaining days of the month.
This real-time assessment of your spending helps you keep your spending priorities in line.
Bonus: it gives you a rear-view assessment of how your spending changes over the years. I love looking back over the years and seeing what I’ve spent in each category for the year. Plus this hindsight view also helps me set my goals for the coming year.
There are just so many benefits to spend tracking that I can’t even count them all. I highly recommend you use at least one month to track all of your spendings. This way you can see in real time where each dollar you earn goes.
In fact, budgeting combined with spend tracking has helped me cut my family’s grocery costs nearly in half. I went from spending $900 a month to under $500 a month – even with four kids!
If you want a more secure and financially stable existence, I highly recommend budgeting. So make your money plan today and create a budget for yourself.
I can promise that if you make and use your budget, it will give you power over your money. And you’ll become budget savvy.
It will help you take those strides toward achieving every aspect of your money plan.
Do you use a budget for managing your money? If so, what type of system do you use and is it working for you? If not, what’s stopping you? Share in the comments on our Facebook page.