What I Wish I Learned in School: Budgeting Basics - A Step-by-Step Guide to Taking Control of Your Finances
Managing your money doesn’t have to be difficult or tedious. Whether you’re trying to save up for a dream vacation, working to pay down debt or you just want to stay on top of your monthly expenses, creating and sticking to a budget is the cornerstone of financial success. Here’s how to get started.
Step 1: Know your income
Before you can plan your spending, you need to know exactly how much money is coming in. List all sources of income in your home, including:
- Salary after taxes
- Side hustle earnings
- Investment returns
- Any other regular inflows, such as unemployment benefits, disability insurance or Social Security payments
This is your starting point. Be realistic and stick to consistent, reliable income sources when calculating your monthly total.
Step 2: Track your expenses
Now you’re ready to track your spending. Keep a log of every purchase you make over 30 days, from mortgage payments to your daily cups of coffee. Divide your expenses into the following categories:
- Fixed expenses, like rent or mortgage, insurance premiums and car payments.
- Variable expenses, like groceries, dining out and utilities.
- Discretionary spending, like subscriptions, hobbies and shopping sprees.
Tracking can be as simple as jotting it down in a notebook or using budgeting apps, like YNAB (You Need A Budget) or PocketGuard.
Step 3: Set financial goals
Why are you budgeting? Having a clear reason will motivate you to stick with your spending goals. For example, you may want to pay off high-interest debt, save up for a large purchase, like a house or car, or prepare for retirement. Clarify your goals before moving on.
Break your goals into short-term goals (saving $500 in three months) and long-term goals (paying off $20,000 in student loans over five years).
Step 4: Choose a budgeting method
There are all kinds of budgeting strategies. Choose the one that aligns with your personality and lifestyle:
- Zero-based budgeting. In this traditional form of budgeting, every dollar is assigned a job. If you earn $3,000 monthly, allocate it to cover all expenses, saving and debt repayment until there’s no money left unaccounted for.
- 50/30/20 rule. In this plan, you’ll allocate 50% of your income for needs, like housing, food and utilities; 30% for wants, like entertainment, dining out and hobbies; and 20% for savings and debt repayment.
- Envelope system. This plan is ideal for cash spenders. It involves putting cash for each category (groceries, entertainment, etc.) into labeled envelopes. When the money is gone, the spending in that category stops.
Step 5: Trim your spending where needed
Budgeting can show you where you’re leaking money. If you’re spending $150 a month on coffee, that comes out to $1,800 a year! There’s no need to sacrifice all indulgences, but trimming unnecessary expenses can free up money for savings or debt repayment.
Here are some tips for trimming expenses:
- Cook up your favorite foods at home instead of dining out.
- Review your monthly subscriptions and cancel those you don’t really use.
- Shop smarter with sales, coupons and cash-back apps.
- Choose free or low-cost entertainment.
Step 6: Build an emergency fund
Without an emergency fund, any unexpected expense, like a car repair, medical bill or job loss can throw off your budget and set you back on your financial goals. Aim to save up at least $1,000 as a starter fund, then gradually work up to 3-6 months’ worth of living expenses.
Step 7: Review and adjust
Life is unpredictable, and so is your budget. Review it monthly to ensure it reflects your current income, expenses and goals. Unexpected changes — like a pay raise or an increase in expenses — will require adjustments.
Tips for sticking to your budget
Creating a budget is only the first step in managing your finances. You’ll need to stick to it, too! Here are some tips for making that happen:
- Automate your savings. Set up automatic transfers to your savings account so you don’t even have to think about it.
- Track progress. Celebrate small wins, like paying off a credit card or hitting a savings milestone.
- Stay flexible. If one method isn’t working, try another. Budgeting is a personal journey, and it’s OK to experiment.
- Use technology. Apps, like YNAB and EveryDollar, simplify budgeting and help you stay on track.
Budgeting isn’t just about cutting costs — it’s about empowerment. It provides a sense of control over your finances, reduces stress and brings you closer to your dreams. Use this guide to get started on your budgeting today!