Beginners Guide To Budgeting
It’s hard to build a house without some type of blueprints. In fact, a builder will take time to plan every single detail when building that house and making changes when necessary. That’s exactly what a budget is, but it can be hard to create one if you have never done it before. However, if you think of a budget only as a blueprint you miss out on using it to its full potential. A budget can also be compared to a sword and shield from your greatest enemy, Debt. A budget will help protect you from taking on more unnecessary debt and at the same time help you to defeat the debt you already have. But like any great warrior you have to be trained on how to use your sword and shield and trained on how to build your castle so that you will be safe for years to come. By reading this you will hopefully get a running start on creating your first budget.
Set a goal
It is hard to plan a trip when you don’t have a destination in mind. Same with a budget, figure out what your goals are for it. Are you wanting to pay off your debt, save more, and have extra money to invest? It doesn’t matter, but you need to figure out your financial goal at the very start. Understand over time this goal will change, because over time your needs will change as will your desires and that’s ok.
There are two types of goals you should set short term and long term goals. Short term goals should be things like paying off any debts you might have as quickly as possible and long term might be saving money for an emergency fund and for retirement. Figure your goals out and start getting to work so that you can reach them as soon as possible.
Figure out your income
Now, this part is pretty simple, but don’t worry I’ll add a twist. If you are working on salary it’s pretty easy to figure out how much you’ll bring home a month, but hour to hour could be a little more difficult, and don’t worry. So you will have to estimate at the start of each month and then figure out what the actual amount is to get an accurate idea of what happened that month with your expense. By doing so you can better prepare for the future.
As for that twist I was talking about, figure out where your passive income or extra income is coming from. Understanding passive income is money that is working for you and making money for you while you are sleeping. In today’s world, this is something important to learn. Now while, I won’t be writing about how to make passive income in this article, understand it is something you will want to learn and get, and once you get it you will become addicted to it.
As for extra income, that is money you made by doing a side hustle or random other jobs. That is just as important as the passive, money from this will help you both reach your financial goals and personal goals quicker. More on this to come in another blog post, but I will leave you with this. Ask yourself what something you love to do and ask how can you make money off that?
Figure out your expense
There are two types of expenses fixed and variable. Fixed ones are the ones that you will have to pay no matter what, while variable not so much. For example, fixed would be your house debt, while variables might be going out to eat on a Saturday night. It’s important to understand the difference if you are going to create a budget.
The first thing you want to do is figure out your fixed expenses and see what is leftover and then begin to factor in your variable. Now variables are often nonessential things, like movies, going out to eat, or snacks. It’s in these areas you want to figure out what you can cut back on and set an amount you’ll spend on each thing a month. Whatever you do try to stick to the amount you budgeted on, if you can do that, then you are well on your way to get your financial life under control. 90% of getting your finances under control is mental, and if you can win in your mind, you can win at it all.
Another thing to note, it will be important to record all your expenses throughout your month so you have an accurate idea of what all your spending. There are numerous ways you could go about doing that. You can keep receipts, write them down in your phone, or download an app that will keep track of them for you.
Be willing to make mistakes. We all make mistakes at some point in life and making a budget is no different. The first few months of your new budget will probably be a complete disaster and that’s ok. You might have budgeted too little for groceries or too much for the movies. You might begin to realize that you are spending too much in one area and need to make cuts to that area. It’s all about trial and error and you probably won’t start getting it right until month 3 or 4. The only way you fail is by giving up.
When you do feel like giving up just remember why you started this journey. What was your goal at the start of this whole thing and are you willing to give up on that goal or dream you have for your life just because things got hard? Don’t give up, you’ve come too far and deserve a better life than that of one that lives paycheck to paycheck.
Pick the type of budget you will do
There are multiple choices you can choose from, you just need to figure out the one that works best for you.
The Envelope System
This type of budgeting system is cash-based which is great for those of you who are known to overspend every month. Since you are often to spend more using a debit or credit card, this system makes you put cash into pre-labeled envelopes with the designated amount you are to spend on that category for the month.
The 50/20/30 Method
This is geared towards those who can be a little more flexible in their finances. It is for those who can pay all their bills with 50% of their income. The 20% goes towards savings or debt reduction or a little bit of both. While 30% goes to personal spending.
Similar to that of the last one, the only real difference is that 60% of your income goes to paying the bills. While the other 20/20 go to savings and personal things.
Zero Based Budget
This one is for those who are well disciplined or want to get complete control of their financial life. The Zero-Based Budget forces you to spend every dollar you make. Not a single dollar is misplaced. You will never ask where your money is going. This is one of the best budgets to get an idea where every single dollar is going and can help you knock down your debt quicker and save up quicker. If you have done everything right, then you should have zero dollars left at the end of the month. Don’t misunderstand, this does not mean you spent all your money. Rather, you have put your saving money in your saving account and paid your expenses, and did not take on any additional debt.
Pay yourself first budget.
This is for those of you who want to prioritize saving over everything else, more than paying bills, expenses. Don’t worry in this budget you will pay everything you need to but your priorities are set on something else, something greater.
If you aren’t the most organized person, don’t worry there is still hope for you. Thanks to technology, there are plenty of budget apps you can choose from. Just search budgeting in your app store and you will find hundreds of choices. Click here to learn the top 2020 budgeting apps.
Above all else, the most important step to creating your budget is staying committed. You won’t get very far if you aren’t committed 100%. Things will be tough, and you will have to say no to going out sometimes, but remember why you started this journey. Dave Ramsey once said, “live like no one else, so that later you can live like no one else”. This is a long-term game, and you have to remember that. Just think how free you will be once you pay off all your debt. It might seem impossible now but know there have been others before you who thought the same thing and were in worse situations who did it. So, what is stopping you from doing it too? The only one holding you back is you. I’ll end this by just asking will join me and millions of others on this journey of a lifetime?
Hopefully, this has helped you better understand what a budget is and how to go about creating one. But don’t worry we aren’t going to leave you to fight all alone. You’ll find at the bottom of this article an excel of a budget created by Helpful Jack himself. It follows the pay yourself first method, to get you saving money quickly. Pay yourself first, so you can start investing or paying off your debt quicker than you could have ever imagined.