How To Make a Budget as a Beginner

Creating a budget can be tedious and boring, and sticking to it can be even more challenging. However, it’s the simplest way to get your personal finances in order and ensure your money goes toward the expenses that matter the most to you.

But as a beginner or a person who’s never paid much attention to budgeting or personal finances in general, it can be a jungle to figure out where to start?

It’s actually not that hard.

Believe me, I was once in your place, but with a little self-studying I figured out how to not only make a budget but also how to make it a fun and more manageable task. Something I now look forward to doing each week.

Why is a budget crucial?

A budget helps you plan ahead for your future expenses. A budget also keeps things organized, which makes it easier to work towards financial goals. There are many reasons why you should have a budget, including:

You don’t want to overspend. Having a budget helps keep you under control financially.

Your finances are in order. If you’re not sure where your money goes each month, having a budget gives you insight into your spending habits. This is great for saving money.

You avoid debt. Finances play an important role in your daily life. When you have a clear understanding of your income and expenditures, you can avoid getting yourself into debt.

You enjoy financial freedom. Financial independence means being able to do what you want without worrying about how much money you have left at the end of the month.

You feel comfortable. Financial security comes from knowing your current financial situation and planning for the future. Budgeting shows you where your money is going and what is coming in. Knowing your monthly cash flow makes you feel confident about your finances.

You save time. Setting and following a budget takes little effort. Instead of trying to remember if you spent $200 last week, you just look at your bank statement and know exactly how much you spent. And, since everything is organized, you’ll have less time looking for receipts.

You sleep well at night. Being organized will keep you calm and relaxed throughout the day. You won’t worry about making a mistake at work or forgetting something at home.

You feel motivated. Money motivates people to achieve their dreams. By setting goals and keeping track of them, you might find it motivating to get out of debt, learn more about investing, or improve your job skills.

You live a healthier lifestyle. Studies show that those who regularly budget experience fewer medical problems than others. Spending money on items that make you sick isn’t smart. Healthy eating habits and exercise routines often cost money, but they help prevent illness and disease.

You’re happier. When you set a budget, you may find yourself feeling more satisfied with your life. Since you understand what’s coming in, you can take steps to improve your finances.

Your relationships prosper. Your partner would never criticize you for buying expensive gifts if you showed him or her what you planned to spend. Likewise, your child wouldn’t be upset if he knew you were paying his or her bills before others.

You’re more productive. Working harder doesn’t always mean working smarter. Sometimes, it means working faster. Productivity improves when people are clear about their goals. In addition, having a good handle on your finances can inspire confidence and boost productivity.

There are no right or wrong reasons to follow a budget. However, if you decide to start one, here are some

1 Identify your total income

First, you must identify your total income throughout the year and divide it over 12 months. Some only have a single income source, others have many, and some aren’t even aware that they receive money from other places than just their job – thus this first step is crucial.

1.1 Income from your job

It’s no surprise that most people receive most of their income from their job – or from their own businesses.

Figure out if you get paid the same amount each month or if it differs. Ask questions like; Do I ever work overtime, do my payments differ in relation to my performance, do I receive bonuses some months, etc.

When you know these things, then try calculating your yearly income, and spread it over 12 months. If it’s hard, then use last year’s income, if your salary hasn’t changed that much since.

1.2 Gifts

Many people don’t want to spend time going out buying gifts for their spouse, friends, children, parents, and so on – instead they give them a handful of money.

If you are one of those who sometimes receive money as a gift, you should calculate this as income.

All the money that flows into your bank account, except loans, is income, also money gifts. Of course, the giver might demand you to use the money on something specific, but if not, that money is income to use other places in your budget.

1.3 Small jobs

Small jobs are things like you fixing your friend’s car engine, or you getting groceries for your grandma because she is sick. Some of these smaller tasks sometimes result in a little extra money.

Not saying you should charge money for delivering groceries to your sick grandma, but we all know grandmas often want to give you a little something – and that little something no matter if it comes from your grandma, friend, acquaintance or dad is income in your budget.

1.4 Side hustles

In my opinion side hustles differs from small jobs because side hustles are something you do on a more regular basis. This might be freelance work on Upwork, flipping stuff, washing cars, writing online, etc.

From such work, you earn some additional income, and that’s something you should also implement in your budget when identifying your total income.

1.5 Investments

Finally, you may have a portfolio of dividend stocks. Dividend stocks are stocks paying monthly, quarterly, semi-annually, or annual dividends as a “thanks for being a shareholder”.

If you have dividend stocks make sure to distribute the dividends from the year over 12 months in order to have the best possible estimate for your total income.

2 Calculate your expenses

Now it’s time to move to the cash out-flow of your budget; expenses. If you don’t know where your money is going, it will be tough for you to change your habits and spending patterns.

And if there’s something that’s essential to a better financial situation, it’s a great spending pattern – thus now it’s time to calculate your total expenses.

2.1 Bills

First on the expense list; bills. These are your fixed expenses each month, and they include expenses such as

Rent
Phone
Electricity
Insurances (Health, Car, etc.)
Subscriptions,
Debt Payments

These are also bills that you cannot do much about without big changes. For instance, if you want to lower your rent, you must move or rent out a room, which in my opinion is a huge change.

Collect all your fixed bills, and calculate the total amount you use on these categories.

2.2 Variable Costs

As the name indicates these are expenses that can vary from month to month, but having a great estimate of how much you may/want to spend on these categories is a great idea.

This section of your budget includes categories like:

Groceries
Utilities
Pet/childcare
Gas
Gifts
Unforeseen costs
Entertainment
Shopping

Some of these variable costs fall under the category “wants and likes” costs as I like to call them. These costs are one of the main reasons why people end up broke and with a lot of financial problems.

Such costs are for example shopping and entertainment – things you don’t need, but things you want and like. To read more about these costs, and how to fix them click here.

3 Financial Goals

With both income and expenses in place, it’s now time to set yourself up for the success you want and deserve.

This is done by writing down 1 to 3 financial goals that you want to achieve within a specific time frame.

These goals could be like the following:

I want to pay off all my debt in no more than 5 years.
I want to save up for a down payment on a house in a year.
In 2 years I don’t want to worry about my financial situation anymore.

Writing financial goals down might sound silly, but it is a crucial, and often overlooked, part of setting up a great budget.

It gives you purpose and motivation to stick to your budget, and it also makes budgeting more fun since you know can track how long before you reach your financial goals.

However, these financial goals cannot be reached without a plan, which is the next step.

4 Make an action plan

Action plans are designed to help you achieve your financial goals. They are small steps that you can check off along the way.

Here’s an example of how you could structure it. This is a printable of mine you can download for free along with many other sheets here:

An example of a plan could be:

“I’m going to cut down on my “wants” costs, contribute more to my savings, and allocate some money to pay off my debt”

And the steps that are associated with the plan could be:

The maximum online shopping amount each month should be $75
Set aside $2 each day for debt payments
Only one to-go coffee a week
No shopping Fridays
Start a saving challenge
Deposit at least $100 every second week to my savings account
Any extra money at the end of the month will go to investments

This is just a quick way to set it up, and every time you complete a step then check it off to the left. Doing this will give you the feeling of completing something and it keeps your motivation up.

As the year goes on, you can change it a bit in the steps or make a new plan as long as they all contribute to reaching your financial goals.

5 Monitoring

Consistently keep monitoring and adjusting your budget as you move forward. Maybe set a tighter, but still easy, budget at the beginning of your budgeting journey – and as you become better and more advanced you can cut even more off your expenses.

Monitoring should be done monthly or even weekly, and if you live together with a partner consider including him/her in the monthly/weekly monitoring, and discuss what’s the next step.

Being on the same page as your significant other creates alignment between the two of you. You know what’s expected, you support each other, and you both spend money in a way that benefits your financial goals.

6 Extra tips to consider

With all the fundamentals in place, it’s time to look at some tips that will help you in the long term and keep the process fun and your motivation up.

6.1 Don’t try to account for every penny

When I first began tracking my personal finances I tracked everything – I mean everything. Every little cent or penny that flowed into or out of my life was tracked.

Of course, I tracked big things like paychecks, rent, and grocery shopping, but sometimes I bought a pack of gum for $0.1, and I kept reminding myself that I needed to write that in my budget otherwise, things wouldn’t work out.

This made budgeting the most tedious task on earth, and it wasn’t effective at all. However, after I learned to ignore the ultra-micro-expenses, budgeting did not only become more fun but also more effective and easier to stick to.

6.2 Focus on the big picture first

Micromanaging your budget and adjusting here and there to be able to go out a weekend shouldn’t be how you budget.

Instead, you should focus on the bigger picture and your long-term goals. Instead of panicking or saying no to a night out (which sometimes is necessary) just spend a dollar less once in a while, and you’ll be good.

Focusing on the short term will not do you any good.

6.3 Add categories

When you reach a great baseline, and you feel ready to push yourself a bit, you can start adding new categories such as investments. But don’t overestimate your capabilities in the start, since every lost battle in the start can make you wanna quit budgeting immediately.

Thus start slow, and add categories, when you feel ready.

6.4 Be realistic when setting your budget

Dreaming is okay, but being unrealistic will destroy your progress and motivation. Thus, set up ambitious, but achievable, realistic, time-bound, specific, and measurable goals (SMART-goals).

This will help you stick to your great financial habits rather than quitting before you’ve even started.

6.5 Don’t put too much pressure on yourself

It’s just a budget. Don’t be too hard on yourself if you miss something or if you didn’t keep the budget for your groceries for one month. You learn as you go, and budgeting is a process.

I’m not saying you should not care about exceeding your budget, because you should. But one or two times are not the end of the world.

6.6 Don’t forget that unforeseen circumstances arise

Unforeseen events will happen, and we simply cannot predict although that would be nice. So, even though you’ve established a budget, it’s best practice to allow room for flexibility.

This will help you when inflation hits hard, you receive a medical bill, your car breaks down, or similar.

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Wrapping it up

Following the five steps above and implementing some of the extra tips will make you a budget ninja. No longer will a budget be a tedious and ineffective task, but something that you enjoy.

How To Make a Budget as a Beginner

Why is a budget crucial?