If you're reading this post, it's probable that, like most people, you haven't paid too much attention to budgeting in the past. The truth is, not everyone likes the idea of budgeting as we mentioned in our post about personal finance tips. It can be challenging to stick to a budgeting plan, especially if you're just getting started.
But by following a few basic principles, budgeting will become easier and easier as you move further into the path of financial stability. Below, we'll discuss our top 10 budgeting tips for getting started with budgeting, as well as how you can stick to your plan in order to see a difference in your finances.
How To Set Budgeting Goals
The key to an effective budgeting plan is to have clear goals. There's a reason why you should budget and there's probably something, in particular, you want to accomplish through budgeting, be it to pay off your debt or to buy a new phone.
So, before you actually start working on the following list of tips, here are a few preliminary questions you should be asking yourself to help you create a solid budgeting plan.
#1 Why Budget?
Budgeting is a personal decision, so only you know why you need to do it. You could have a myriad of reasons why you'd want to start budgeting. Maybe you have some credit card debt you want to get rid of, or maybe you want to save up so that you can create an emergency fund or even a dream vacation you've always wanted to take.
All of these are valid reasons to budget, but you need to be specific, pick the one you feel is most important and stand by your decision firmly. For it to be effective, you have to avoid being general or vague when you define the reason why you budget. That way, when you accomplish what you set out to do, you'll be rewarded with a flush of dopamine that will make you feel like a million bucks.
You must treat budgeting like a good habit that needs reinforcement. Having a strong and well-defined reason behind budgeting will make that reinforcement more powerful and the entire process far easier.
As an additional tip, it wouldn't be a bad idea to put these reasons on paper (or a whiteboard would be even better). This serves two purposes: it helps you organize yourself, and it also works as a visual reminder of what you plan to achieve with budgeting.
#2 What Do I Plan To Achieve With Budgeting?
While having a reason to budget is nice, you can't budget effectively if you don't have one or more precise financial objectives you plan on completing. This means putting things in numbers. It's not the same thing to say “I'm going to save money for a new mobile phone” than saying “I will save XX amount every month in order to buy a new phone in XX number of months”.
Ask yourself questions like:
- How much money am I willing to put aside to start investing?
- How much of my debt will I pay per month?
- What is the timeframe to accomplish my financial goals?
Having clear answers to questions like these will make it much easier to set up a roadmap that will let you accomplish them and also helps you check in every once in a while to make sure you're on track. Once you have these numbers in mind, write them down and make sure you accomplish these goals as you're budgeting.
The more organized you are with these financial goals, the easier it will be for you to accomplish them.
#3 Are My Goals Actually Achievable?
It may seem like a weird question to ask yourself, but it's very easy to get a wrong idea of what you can achieve with budgeting, especially at the beginning.
Budgeting is a slow process where small changes accumulate over time — sure, it'd be great if you could save thousands of dollars in one month, but unless you have an income to back it up and do some hardcore saving, this usually isn't achievable.
For this reason, you need to be patient and start small. Don't begin by setting too ambitious goals because it will be very discouraging if you don't accomplish them. On the other hand, if you break up one major goal into several simple intermediate goals, you'll get a boost in confidence every time you accomplish every one of them, making the next one easier than the one before. Do this and, before you know it, the results you're hoping for will arrive.
Top 10 Tips To Start Budgeting
Now that you know what questions you need to ask yourself before creating a budget plan, here are our top 10 tips to start a budget that works.
#1 Analyze Your Expenses
One of the first things you should do is buy a budget planner, go through your expenses and determine what aspects of your life you spend the most on.
One way you can categorize your expenses is like this:
#1 Monthly Expenses
These are recurring expenses you know you'll be doing constantly on a monthly basis, like your insurance, electricity, water, and Internet bills. It can also include the cost of a monthly medical treatment if you have any, and costs associated with housing, food and transportation.
#2 Yearly Expenses
These are also regular expenses that you can predict, but they will happen in the future. One expense you can include in this category is taxes, which you have to pay every year.
Ideally, you want to create a rough estimate of how much you'll be taxed per year in order to save up that amount (and maybe 10% more, to be safe) on a monthly basis. Having taxes hit you all at once is not pretty.
#3 Irregular Expenses
This category is for expenses that happen infrequently and/or are hard to predict. Groceries can go in this category because the amount of money you can spend on groceries can vary greatly as time goes on.
Write these expenses down and come up with a monthly average that your budget can account for at the end of the month, ideally with a little extra included just in case.
Once you've thought of some categories, add all of your expenses up when the month ends. Not only will this allow you to see more clearly where your money is going, but it should also help you be more careful with your spending too.
#2 Analyze Your Income
Once you've classified your expenses, the next step you should take is to classify your income sources.
Write and add up every little income source you have, whether it's your day job, a side hustle, or a source of passive income. This should help you have a clear idea of how much you can spend per month overall, which is crucial for the next point.
#3 Divide Your Income
By knowing what you spend and what you earn, you'll be able to determine how much money goes towards your financial goals on a monthly basis.
You might be tempted to choose big amounts of money per goal in order to complete them faster, having a clear idea of your income will allow you to be more realistic about how much you can spend or set aside for each category. It's important to be patient — otherwise, your budgeting plans may backfire, which brings me to my next point.
#4 Don't Overspend
Falling into the trap of overspending can be pretty easy, especially when you use your credit cards incorrectly and spend money you don't have.
One way you can avoid this is by using the categories you've previously established to create limits and resist the temptation to overspend. Discipline is key when it comes to following your budget, otherwise, you're just wasting time.
Another way you could avoid overspending is by tucking away your money in envelopes for each spending category — this is known as the cash envelope method, and it's very effective.
#5 Plan Big Expenses Ahead Of Time
You should also be incorporating large, non-monthly yet foreseeable expenses like life insurance or buying new furniture into your budgeting plans — the best way you can do this is by breaking up the lump sum into monthly instalments to your own personal saving fund so that, by the time you need to make the payment, you'll have all you need already set aside.
These are known as sinking funds, and they're called like that for a reason: they can make the difference between staying on budget each month or having your budget sunk by overspending.
#6 Separate Needs and Wants
Once you've clearly established your expenses and planned out how you'll use your income, any extra income that's not accounted for will become available spending money. Good job!
But it's here where you have to be the most careful because you'll be tempted to use this spending money on wants that are outside your financial goals.
And to avoid doing so, you'll need to rethink the difference between needs and wants, which is anything that involves or resembles entertainment, going out, or buying clothes you already have.
You’ll need to prioritize your needs first. Think of them more strategically: ask yourself how much you spend on any given need, and then ask yourself if you can spend less on said need and still achieve the same result.
After that, there's a hard pill to swallow — if your financial goals are to save more money than you did in the past, you’ll now have less expendable money to spend on your wants. There's no other way around it.
It'll be difficult to adapt to this lifestyle, but there's a silver lining — separating your needs from your wants will teach you self-control, and you'll be able to stay away from unnecessary expenses as much as possible.
Also, whenever you do spend on your wants, remember to give yourself a couple of weeks before actually doing so in order to ponder on the purchase — basically, before you buy something you've wanted for a while, sleep on it.
#7 Avoid Common Budgeting Mistakes
We've mentioned before that you should avoid overspending at all costs, and you might have already mastered this art by now. But there are still a few sneaky expenses that make you spend more than you should without you even realizing it.
Here are two categories you might want to reconsider your expenses on:
#1 Eating Out
Eating out is an occasional expense that can quickly get out of hand if you're not careful with it, and this is especially true if you have a significant other.
The best way to avoid overspending on eating out would be to learn how to cook — after all, a meal you cook at home can be anything from half to one-tenth of the price of a meal you buy at a restaurant. Sounds like a huge save, right?
So, make sure you're being objective when analyzing your eating-out expenses. Should you really spend that much money on meals that you could cook yourself?
#2 Subscription Services
Subscriptions like Netflix, Spotify, and Amazon Prime often claim that you'll only be spending a couple of dollars a month for a list of benefits so that you join their programs, and it's hard not to fall for this trap.
But you need to be aware of the fact that these few dollars spent here and there do add up, and they'll make your monthly expenses go up considerably.
Once again, you'll need to take some time to analyze every service you're subscribed to and see if there are a couple that you could live without. If one of your goals for budgeting is to save more than you used to, you'll need to limit your recurring expenses as much as you possibly can.
#8 Change Your Mindset On Saving
When you reach this point, you'll have a pretty good idea of how to create a basic budget and how to stick to it, but there's still some room for optimization.
For starters, budgeting and saving money are not just about planning all your income and expenses at the beginning and end of the month — it's an ongoing process that takes time to master.
In order to make budgeting more effective, try to find little things you can do each day to save more money. It could be aiming to take shorter showers to lower your water bill, or buying unbranded food items that are cheaper than the brand you usually buy.
When applied to your everyday expenses, these small changes can add up to big savings over time, and once they become second nature, you’ll be saving money every day like if it were a mere afterthought.
#9 Modify Your Budget As Time Goes On
In line with our previous point, budgeting is an ongoing process, and not something you do once and then forget about. This means that change will occur over time, and you should welcome it with open arms. This also means that you'll have to adapt your budget as time goes by.
You should regularly consider things like whether you're saving as much as you originally intended or if you're restricting yourself too much, and adjust your budgeting accordingly.
Then, there are unforeseen events that you can't predict nor control (whether they're good or bad), and these need to be addressed by your budgeting as well when they occur.
Whatever it may be, make sure that analyzing and planning your budget is something that you're doing regularly. This will ensure that you have the best budget for you every single month and that you're always on track.
#10 Go At Your Own Pace
The last tip on our list is to be patient. Like we mentioned at the beginning, budgeting is like a good habit you're encouraging, and habits take time to become a permanent part of your life.
In fact, a pretty useful rule you can use is the 21/90 rule — it states that it takes 21 days to make a habit and 90 days to make it a permanent lifestyle change.
Budgeting is not easy, and it's also not a magic trick that will make you halve your entire expenses in one week. It's a process that takes time, effort and discipline and regularly changes as you find ways to improve your budgeting even further.
So, cut yourself some slack and go at your own pace — there will be times budgeting will feel frustrating, but make sure you're constantly reminding yourself why you're budgeting in the first place by taking a look at your financial goals.
It'll all make sense once you start achieving them.
Budgeting, while not the easiest thing to do, is one of the most effective ways you can save money and accomplish your financial goals.
With these 10 tips in mind, you should have an easier time with starting a budget from scratch, sticking to the budgeting plan you came up with to make a difference in your finances, and avoiding some of the common overspending pitfalls along the way.
Just make sure to modify your budget constantly (so that you have the right balance between restriction and spending), plan big expenses ahead of time, change your mindset on saving, and go at your own pace.
With these tips, you'll be on your way to the financial freedom you've always wanted.