Who wants to talk about budgeting for beginners?! (crowd boos)
Yea, yea… I know. Budgeting gets a bad rap. It didn’t do anything wrong… people just tend to associate budgeting with a life of misery and deprivation.
In reality, if you’re budgeting, you probably have more money than you ever imaged. You’re living a life of freedom and crushing your financial goals!
My wife and I desperately needed budgeting for beginners and following these simple steps helped us lock down our personal finances. These simple tips helped us pay off over $100,000 in debt!
Budgeting For Beginners Step 1: Auditing Your Spending
Prior to our first budget I never knew where our money was going. Every month was a blur and our debit cards ended up with tendinitis from over use. We desperately needed a budgeting for beginners lesson…
We were a mess and we were operating on a foundation of hope. Each month we hoped that our checking account didn’t get overdrawn, we hoped that the other didn’t spend too much…
Hope isn’t an appropriate foundation to your financial success.
One day I logged on to look at our bank account and realized I could export the information to excel. A few minutes later and I had a monthly list of all our spending. Holy cow…
This was one of the most shocking exercising that I’ve ever completed. One of the benefits of budgeting is a complete vision of your spending… and sometimes, it’s not pretty.
As hard as this is, you’re budgeting journey starts here. You need to know where your money is going. Pull your previous 3 months of spending and export it to an excel file.
Once you have your information on an excel file, you’ll need to add a filter to the top row. Adding a filter is super easy.
Just highlight the whole row (click the row number), click Data, click filter. Bingo bango, you’re an excel wiz, baby!
You can now filter each column by type. This will make it super easy to move on to budgeting for beginners step #2!
Budgeting for Beginners Step 2: Document Your Findings
Once you’ve pulled the general data, you’ll need to categorize it.
Create some categories such as food, vehicles, entertainment, dining out, and whatever else starts to show up on your routine spending.
We use the following categories:
- Vehicles (gas, maintenance, fees)
- Groceries (food and home miscellaneous items)
- Entertainment (dining out, date nights, etc…)
- Pet Supplies (food, vet bills, treats, toys)
- Reoccurring monthly bills (mortgage, cell, cable, trash, etc…)
It might take some time to ensure the money is documented correctly. Your purchases will be listed by the store. So, it might take some guess work to remember exactly what you bought at Family Dollar or BP.
You should have a pretty general idea and, again, this doesn’t have to be exact…yet.
Once you’ve completed your audit for each month, add up each category.
The spending from the previous 3 months will NOT be your new budget, but it will give you a general baseline idea as to how much you should be spending.
Most likely you’re going to be in a state of shock after you’ve completed the audit and categorized your spending. Funny how money has a tendency to slip away if you don’t pay attention to it…
We found we were spending hundreds of dollars going out to eat, on unused monthly subscriptions, and other frequent money leaks that were robbing us blind!
This is an incredibly eye opening process, but don’t beat yourself up about past spending mistakes.
That spending is over and done with, now you’re getting your financial life together for good!
Budgeting for Beginners Step 3: Create Your New $0 Budget
Phew… You made it! The audit and documenting will most certainly be the most tedious part of creating your first budget.
Now that you know where your money is going, you need to create a plan on how to spend next month or pay period.
In our home, we create a budget 2 weeks at a time. This follows our pay schedule and actually makes it much easier than trying to budget for an entire month.
Use the categories you created in Step 2, and list them out.
Beside each category, place the maximum amount you’re going to spend.
I say the maximum amount because once you hit that number, you’ll have to shut down spending in that category until the next budget begins.
Once you have all of your categories and amounts listed, you’ll add up each category for your budget total. If this total is more than you bring in, you’ll have to go back and evaluate your plan.
Remove some money from areas that can afford a cut. This might be entertainment or monthly subscriptions. Start with the low hanging fruit before you start to consider a fasting diet…
What if you have extra money?
If the total is less than you bring in, GREAT!! That extra money can be either saved, or put toward getting out of debt!
After all, controlling your money should lead to financial success. Whether that’s debt or financial freedom, be purposeful and goal driven.
One thing to consider when budgeting is that you’re accounting for every dollar in and every dollar out! You’ll budget for every penny.
This is referred to as a “$0 based budget”. I would highly encourage you to NOT budget to a true $0 in your checking account.
Leave a buffer there to account for errors. The first few months of your budget are going to be filled with trial and error. A budget beginner can lose a lot of steam when they get kicked in the face with $75 in over-draft fees…
To this day, we still leave at least $100 in our checking account to catch any slip ups. Budgeting isn’t about being perfect, it’s about having a plan.
Your plan will eventually be near perfect, but mistakes happen and you don’t want to be punished for your intensity.
Budgeting for Beginners Step #4: Track Your Spending
As you make purchases or pay bills, you absolutely must update your budget! This means you’ll be looking at your budget every day, or at least every day you spend any money.
You can use an online application like the Every Dollar App to track your spending. You’ll have to create your budget within the app and then just manually enter your spending.
After you enter your income and expenses, Every Dollar will show you how much cash is remaining. I always felt secure by looking at how much money I had left after our monthly expenses.
You can purchase their “pro” version and it links to your bank account. This will allow the app to auto-populate your spending. I’m too chea…frugal to pay for something that I can do on my own.
As you enter your spending, the app will automatically subtract your spending from the budgeted amount and leave you with a remaining balance. I highly recommend an app like this for every beginner budgeter.
Once you get a consistent routine, you can break out and do it manually. We used the Every Dollar App for a few months and then moved to a manual excel budget.
One down side to the Every Dollar app is the fact you can only create monthly budgets. Bi-weekly budgeting works for us and this isn’t an option with the app.
So why are we spending so much time talking about tracking your spending?
The tracking step is wildly important. You can create an amazing budget, but if you don’t track your spending… it’s all for nothing.
Tracking your spending also adds in an incredible amount of accountability.
As you spend and see your available money decreasing, it tends to tighten the wallet and make you rethink purchasing that superman costume for your cat.
The tracking portion will also help you fine tune your upcoming budgets. This will take some time, and don’t beat yourself up if you over-spend on your first few budgets.
It can take 3 or more months to really get a handle on how much you need to budget into each category.
Budgeting For Beginners: Final Word
Budgeting should be a freeing exercise. Don’t make it into a contentious point between you and your spouse.
Fighting over who’s spending too much will only prove to erode your efforts. Have serious conversations around the budget and your family’s financial goals. Remember, this is a team effort.
Finally, it’s going to take time and energy to get it right, don’t fret over your errors within the first few months. You’re going to make mistakes…it’s going to take time dial your numbers in.
Once you move past budgeting for beginners, you’re going to find that you have a lot more money each month than you had previously thought.
This extra money comes from the fact you’re no longer over-spending or leaking money on meaningless possessions each month.
That extra money will help propel you toward financial success!
Let us know how your budget is going in the comments!!