According to recent data, most Americans (roughly 84 percent) have a household budget. However, despite having a budget in place, most US adults still exceed their limits, accruing debt and other liabilities in the process. Even if you have a budget, is it as accurate as possible? Are you tracking all of your expenses or just big ones like rent and utilities?
Creating a budget doesn’t have to be an overwhelming experience. Even if you don’t have any structure right now, budgeting can help you save money and achieve your financial goals. So, with that in mind, here are the essential steps to take when budgeting for beginners.
Step 1: Calculating Your Income
For some people, calculating income is very easy. If you have a salaried job and rarely take unpaid time off, you should already know how much you’re earning each month. However, in modern times, many Americans have income from multiple sources, whether it’s side hustles, gig work, or multiple jobs.
Unfortunately, most gig work doesn’t account for taxes, so you must do that on your own. The IRS has a free tax withholding calculator you can use to determine how much you’ll have to pay in taxes. However, you’ll need to know your total income from all similar sources to get an accurate estimate.
For example, bundle all jobs where taxes are automatically removed and bundle those that don’t remove taxes, such as rideshare driving, freelance work, or gig jobs. Depending on the complexity of your workload, calculating your take-home income may take a while, and you might only wind up with an estimate. However, this is better than nothing. Also, it’s best to be conservative with your estimates to give yourself more of a buffer.
Step 2: Tracking Your Expenses
One of the trickiest parts of creating a budget is tracking all of your expenses down to the penny. When you swipe a debit or credit card, it’s easy to lose track of individual purchases, making it much harder to stick to your budget.
Since we’re talking about budgeting for beginners, we’ll focus on grouping your expenses into different categories rather than itemizing each expense or purchase. Some examples of categories include:
- Utilities
- Rent
- Insurance
- Groceries
- Restaurants
- Auto Maintenance
- Subscriptions
You can create as many categories as you like. However, you should use a spreadsheet or budget template to keep track of them all. You can use free spreadsheet software like Google Sheets or a debt management company to help you budget more effectively.
Step 3: Making a Plan
Once you have your income and expenses written out in a budget planner, you should be able to determine whether you’re making more than you’re spending or vice versa. If you’re bringing in more money than you spend each month, congratulations! In this case, you should make a savings plan so you can build an emergency fund.
If you’re spending more than you’re earning, your plan will be a bit more complicated. There are two ways to shrink the gap between expenses and earnings: making more income or cutting your spending.
The easiest thing is to figure out where to trim your expenses. For example, you can cancel subscriptions, switch to a cheaper insurance carrier, or buy more bulk groceries instead of eating out. Once you have an exact number, you can make cuts to cover the difference. That said, you should also cut enough to save some money each month if possible.
Step 4: Revising Your Budget
No matter how good your initial budget is, it will likely have to be revised at some point. Inflation, unexpected events, and changes in your spending habits can affect your budget in both positive and negative ways.
Ideally, you should revisit your budget every couple of months to ensure it’s accurate. Also, to help absorb small fluctuations, you should build a buffer in your budget planner (earning more than you’re spending). The larger your buffer, the easier it is to adapt to lifestyle changes.
Step 5: Budgeting Tips
The goal should be to streamline your budget as much as possible. Also, make sure to take a long-term approach to budgeting. Realistically, you should follow your budget for years, not just a few months. Here are a few tips and tricks to make your budget as accurate and lean as possible:
- Use High-Yield Account: If you’re putting money away for emergencies or long-term purchases (e.g., a down payment on a house), it should be earning interest. Most bank savings accounts have negligible interest rates, so it’s better to open a high-yield account or put your money into a low-risk investment account.
- Pay Yourself First: Once you determine how much you can realistically save per month, make sure to put it away before spending money on bills or incidental purchases. This way, you’re less tempted to touch your savings because it’s already in the right account.
- Average One-Time Expenses: Budgeting is easy when you have the same bills every month. But what if you have to pay a large maintenance bill or book a flight? While it’s impossible to know when these expenses will pop up, you can average them out over a six-month period and put that amount in your budget. This way, you don’t blow your budget every time you have to pay for something big.
- Try to Save Everywhere: Look for savings wherever you can. Perhaps you can shop at a budget-friendly grocery store or switch to a cheaper insurance carrier. Maybe you can trim your driving to save on gas or reduce your utility bill. Every time you do this, though, put the savings into a separate account immediately. This way, your budget doesn’t technically change, but more money goes toward your emergency fund.
Step 6: Future Budgeting Success
At first, creating a budget may seem overwhelming, but once you have the basics down, it only gets easier. Also, remember that you can adjust your budget as needed whenever you like. If you keep going over budget, readjust your numbers and figure out how to save money or increase your earnings.
That said, there’s always help if you need it. MyStages is available to help with budgeting, financial planning, and more to help you stay on target and realize your financial goals. Don’t struggle on your own, let us help!
