We all learn basic survival and life skills as we’re growing up like tying our shoelaces. However, no one teaches us how to budget or manage our finances. Most of us learn from watching our parents and usually end up making similar mistakes as adults. I wish someone had sat me down and explained to me how to budget for beginners when I was in high school. Unfortunately, no one did so I went off to college and had to figure it out on my own. I made several mistakes along the way and looking back wish that I had a guide to equip me with essential tips to master the art of budgeting.

Being an adult is not easy. We have numerous responsibilities and oftentimes the root of our stress, anxiety, and worry is about money.

As a licensed mental health professional, a common theme I see with my clients is that they are concerned about their finances and lack financial self-care skills.

Oftentimes I encourage them to read The Surprising Truth About Dave Ramsey’s 7 Baby Steps. Rather than being a slave to your finances, you can learn to be in charge and take control.

How to budget for beginners: 7 essential steps

Perhaps you are tired of feeling overwhelmed by your finances.

Or maybe you’re ready to take control of your money and you want to be intentional about how you spend it, save it, or even invest it.

In this comprehensive guide, I am going to show you how to start budgeting like a pro.

No complicated jargon or confusing formulas here – just straightforward advice to help you master the art of budgeting.

Whether you’re drowning in debt, saving for a big purchase, or simply looking to improve your financial well-being, these seven tips will provide you with the tools and strategies you need to achieve your goals.

So, grab a pen and paper, get ready to take some notes, and let’s dive right in!

1. Understand your income and expenses

Before you can effectively create a budget, it’s important to have a clear understanding of your income and expenses.

This knowledge will serve as the foundation for your budgeting strategy and help you make informed decisions about your finances.

So, let’s start by taking a closer look at how to assess your income and expenses.

How to figure out where your money is going

When it comes to income, it’s crucial to consider all sources of revenue.

This includes your primary job, freelance work, side hustles, investments, and any other money that flows into your bank account.

By accurately tracking and documenting your income, you’ll have a better understanding of how much money you have available to allocate toward different categories of expenses.

There are different ways to track and document your income. I use the EveryDollar app which is free and easy to use.

In addition to tracking your income, you need to be aware of how much you are spending.

First, identify your fixed expenses, such as rent or mortgage payments, utilities, and insurance.

Fixed expenses are recurring costs that remain relatively constant each month.

Next, consider your variable expenses, which are more flexible and may change from month to month.

Examples of variable expenses include groceries, entertainment, transportation, and discretionary spending.

Think of discretionary spending as your “fun money” or money you use for activities and non-essentials.

To get a comprehensive view of your expenses, review your bank statements, credit card statements, and any receipts you have.

Next, categorize your expenses into broad categories, such as housing, transportation, food, and entertainment. This will allow you to see how much you’re spending in each area and identify any potential areas for adjustment.

For example, you may have memberships to a gym, Netflix, and Amazon Prime which adds up to $150 a month. You also have car insurance, health insurance, and an annual license fee you have to pay.

Write down every single item that you typically spend money on since it will give you a clearer understanding of your expenses.

Once you have a precise understanding of your income and expenses, you can examine the data to identify areas where you can cut back or reallocate funds.

This analysis will help you set realistic goals for your budget and prioritize your spending based on your financial priorities.

It may seem overwhelming at first, but understanding your income and expenses is an essential step in budgeting.

By taking the time to assess your financial situation, you’ll be equipped with the knowledge you need to create a budget that aligns with your goals and sets you on the path to financial success.

2. Set Realistic Goals

Evaluating your income and expenses is the first step in how to budget for beginners.

Oftentimes people skip this step and just start focusing on their financial goals.

However, if you don’t have a clear understanding of your income and expenses, you won’t be able to identify areas where you can cut back or reallocate your funds.

It might be annoying to keep track of your expenses but it’s worthwhile because you’ll be able to get clarity on how much money you are spending every month.

Afterward, you can set some realistic goals for your budget.

How to set financial goals

Setting realistic goals is crucial when it comes to budgeting.

It’s essential to have a clear vision of what you want to achieve financially and set goals that are attainable.

Whether your goal is to save for a down payment on a house, pay off debt, or build an emergency fund, having a specific target in mind will give your budget a purpose and motivate you to stick to it.

When setting your goals, it’s important to be realistic and take into consideration your current financial situation.

While it’s great to aim high, setting goals that are too lofty can become demotivating if they’re not achievable within your means.

Start by evaluating your income, expenses, and any other financial obligations or limitations you may have. This will help you determine what is possible and ensure that your goals are within reach.

In addition to being realistic, your goals should also be measurable and time-bound.

This means breaking them down into smaller, manageable milestones and setting a specific timeline for achieving them.

For example, if your goal is to save $10,000 for a down payment on a house within two years, you can break it down into saving $416.67 per month. This makes the goal more tangible and allows you to track your progress along the way.

Remember, setting realistic goals is not about limiting yourself; it’s about being practical and proactive.

By setting goals that are attainable, you’ll increase your chances of success and stay motivated throughout your budgeting journey.

3. Create a budgeting system

To truly achieve financial success, it’s important to have a solid budgeting system in place.

This system will not only help you manage your money effectively but also ensure that you stay on track with your goals.

By establishing a budgeting system that works for you, you can take control of your finances and make informed decisions about your spending habits.

How to budget for beginners- easy step-by-step instructions

One of the first steps in creating a budgeting system is to track your income and expenses.

By diligently recording all of your sources of income and every expense, big or small, you’ll have a clear picture of where your money is going.

This will allow you to identify areas where you might be overspending and find opportunities to cut back and save.

You can track your income and expenses using a variety of methods, from traditional pen and paper to modern budgeting apps or spreadsheets.

When I first started budgeting, I purchased an inexpensive notebook and wrote everything down. Eventually, I started an Excel sheet which was easier to use. Fortunately, there are numerous budget apps you can use right from your phone.

Whatever you do, choose a method that suits your preferences and lifestyle, making sure it’s something you can stick to consistently.

The key is to be thorough and detail-oriented, so you don’t overlook any expenses or sources of income.

Remember, you’ll have to keep track of every single expense. That includes the birthday gift you bought your friend or the annual subscription you pay for once a year.

It’s easy to forget some expenses that you don’t pay for monthly. It’s best to keep track of your expenses for a few months and look at your annual spending to create an accurate budget.

How to create budget categories to spend money wisely

Once you have a clear understanding of your income and expenses, it’s time to set budgeting categories.

These categories will help you allocate your money effectively and ensure that you’re covering all your essential expenses while also saving for your goals.

My husband and I have several general categories like housing, transportation, groceries, etc.,

Under each category, we have subcategories. For example, under transportation, we have fuel/car washes, maintenance, car insurance, and car registration.

Although we don’t pay for car registration every month, we have to pay for it annually so we budget for it every month.

Using sub-categories under larger categories is immensely helpful because you will set aside money every month for bigger expenses without having to use your emergency savings.

The benefit of using categories for your budget

Assigning a specific amount of money to each category will help you prioritize your spending and avoid overspending in certain areas.

Be sure to be realistic with your budgeting categories, considering your current financial situation and goals.

It’s important to allow for some flexibility within your budget, so you don’t feel restricted or deprived.

For example, Daniel and I each have a monthly “allowance” that we can use for whatever we want. I typically use my allowance money to get massages.

Review your budget monthly

Don’t forget that reviewing and adjusting your budgeting system is crucial for long-term success.

As your financial situation changes, your budget may need to be modified to reflect new goals, income, or expenses.

Perhaps you got a bonus at work or a new monthly expense is now needing to be added to your budget.

Remember that monitoring your budgeting system allows you to identify any areas where you may be falling off track and make necessary adjustments.

By creating a budgeting system that aligns with your goals and values, you can take control of your finances and work towards achieving financial success.

4. Track Your Spending

Tracking your spending is an essential part of maintaining a successful budget.

It allows you to see exactly where your money is going and identify any areas where you may be overspending or not allocating enough funds.

When you track your spending, you gain valuable insights into your financial habits and can make adjustments as needed.

To start tracking your spending, gather all of your financial statements, such as bank statements, credit card statements, and receipts.

Take a close look at each expense and categorize them accordingly.

This can be done manually using a spreadsheet or with the help of budgeting apps and tools that automatically categorize your expenses for you.

Want to learn more? Here are the 8 best budget apps for 2023.

Once you have categorized your expenses, review the data and analyze your spending patterns.

Are you spending more than you thought in certain areas?

Are there any recurring expenses that could be reduced or eliminated?

“Roughly a quarter of all Americans (34.4%) pay for a gym membership, even if they aren’t using it.”

Richard Laycock & Catherine Choi

Did you know that according to a new Forbes Survey, 50% of people pay for streaming services they don’t use?

Don’t be one of those people and make informed decisions about how you spend your money.

Why it’s important to monitor your spending

Monitoring your spending on a regular basis is crucial for staying on track with your budget.

Set aside time each month to review your expenses and compare them to your budgeted amounts.

This way, you can quickly identify any discrepancies and make adjustments to ensure your budget remains balanced.

Tracking your spending also allows you to celebrate small wins along the way.

When you see that you’ve stayed within your allocated budget for a certain expense category, it reinforces your progress and motivates you to continue making smart financial choices.

6. Cut down on unnecessary expenses

To begin cutting down on unnecessary expenses, it’s helpful to evaluate your current spending habits and determine where you can make changes.

One effective approach is to categorize your expenses into needs and wants.

Needs are vital expenses like housing, transportation, and groceries, while wants are non-essential items or services that you could live without.

Since I work in healthcare, I noticed that a majority of my colleagues spend money on getting takeout and Starbucks coffee.

“The average American spends about $1,100 on Starbucks coffee each year. This includes buying coffee at Starbucks cafes, grocery stores, and online. The average cup of Starbucks coffee costs $2.75, and the company sells about 4 billion cups of coffee each year. That means Starbucks coffee drinkers spend about $3.50 per day on Starbucks coffee.”

The Commons

If my colleagues were aware that they were spending roughly $1,100 a year on Starbucks, they might reconsider their needs and wants.

Take a close look at your wants category

Once you have a clear breakdown of your expenses, take a closer look at the wants category.

Are there any expenses you can eliminate or reduce?

For example, consider cutting back on dining out, entertainment subscriptions, or impulse purchases.

I’m not saying you should not enjoy your life and have fun. Daniel and I budget for our monthly dining out as well as travel expenses.

However, since we have a budget we don’t spend frivolously and are intentional about what we purchase.

One easy way to reduce your daily spending is to pack your drinks, snacks, and meals for work. By meal planning, you’ll save money and eat more nutritously.

Unsure how to get started? Here’s the best meal-planning guide for beginners.

By prioritizing your needs over your wants, you can make significant progress in reducing unnecessary expenses.

Stop paying for stuff you do not use

Ask yourself, are you fully utilizing all the services you pay for?

If there are streaming services, memberships, or subscriptions you pay for but don’t use, then cancel them.

I already said this but your daily coffee runs, vending machine snacks, or convenience store purchases add up.

Consider this, if you spend an average of $20 a day on coffee, snacks, and food during the work week, you are spending $100/week. Annually you spend $5,200.

Do you really want to spend $5,200 instead of packing your lunch and making your coffee at home?

Ask yourself what you would do if you had an additional $100 a week or $400 a month.

By making small adjustments to your daily habits and opting for more cost-effective alternatives, you can free up additional funds to put toward your financial goals.

Ultimately, cutting down on unnecessary expenses is about being intentional with your spending and making choices that align with your financial objectives.

By reducing expenses in certain areas, you can redirect those funds toward your other goals like building your emergency funds or saving for a trip.

7. Build an emergency fund

Building an emergency fund is a crucial aspect of financial success.

Life is full of unexpected surprises and having a cash reserve to fall back on can alleviate the stress that comes with unforeseen circumstances.

“For many people, the 50/30/20 rule is a great way to split up monthly income. This budgeting rule states that you should allocate 50 percent of your monthly income for essentials (such as housing, groceries and gas), 30 percent for wants and 20 percent for savings.”

How much should I save each month?

Whether it’s a medical emergency, a car repair, or a sudden job loss, having an emergency fund gives you peace of mind knowing that you can handle these situations without going into debt.

How to start an emergency fund

To start building your emergency fund, begin by setting a specific savings goal.

Depending on your circumstances and financial obligations, aim to save at least three to six months’ worth of living expenses.

This would cover your essential needs, such as housing, utilities, groceries, and transportation, in case of an emergency.

One effective strategy is to automate your savings by setting up an automatic transfer to a separate savings account each time you receive your paycheck.

By doing this, you’re less likely to tempt yourself to spend the money earmarked for your emergency fund.

Treat your emergency fund as a non-negotiable expense, just like any other bill you have to pay.

As you work towards building your emergency fund, keep track of your progress.

Monitor your savings account regularly and celebrate each milestone achieved.

Seeing your emergency fund grow can be incredibly motivating and encourage you to stick to your budgeting goals.

Building an emergency fund is a significant step towards securing your financial future and being prepared for whatever life throws your way.

So, start saving and take proactive steps towards building a solid safety net, because a little preparation today can make a world of difference tomorrow.

Wrap-up

Curious about how to budget for beginners?

You’re not alone. On average, 73% of people don’t budget according to a financial therapist.

Although I’m not a financial therapist, I disagree with the financial therapist’s opinion that it’s okay not to budget.

Unfortunately, a majority of people who don’t budget end up in dire financial situations. One of the best and most recent examples we all experienced was the COVID-19 pandemic.

None of us were prepared for lockdown, job losses, furloughs, and school closures.

Overnight all of our lives changed and most of us were not prepared for the financial crisis that would ensue.

Nearly all of my clients were facing financial hardship because one or both parents lost their jobs. As a result, they were unable to pay rent or purchase food for their family.

Although the likelihood of a global pandemic occurring again is low, unexpected emergencies come up often.

Whether your car breaks down, you have a medical emergency, or unexpectedly have a change in your family.

Having a budget gives you control, clarity, and intentionality about your money.

You choose how to spend your money, where it goes, and how much you want to allocate.

By following the 7 essential tips outlined in this guide, you can take control of your finances and pave the way for a brighter future.

It is critical to understand your income and expenses, set realistic goals, create a budgeting system, track your spending, cut down on unnecessary expenses, and build an emergency fund.

These steps will empower you to make informed financial decisions and reach your financial goals.

Start implementing these tips today and witness the transformative impact it has on your financial, emotional, and mental health well-being.

What has helped you learn to budget and be mindful of your finances? How do you differentiate between wants vs needs before you buy something? What has helped you achieve your financial goals? Please share your stories and comments below.