Budgeting for Beginners
In a world of consumption, learning how to budget has never been more important. In this article, I will show you step-by-step how to create a monthly budget you can actually stick to for beginners
Did you know 59% of adults in the United States live paycheck to paycheck? With a population of 328 million people, this means 193 million people struggle to make ends meet.
Of the 328 million Americans, 62% have an no emergency fund, that is a staggering 203 million people. To make matters worse, 20% of Americans have absolutely nothing saved for retirement – that is 66 million people.
Where is All the Money Going?
Typically, housing costs are people’s highest monthly expense. The chart below shows how much American’s are spending on housing at every age.
For instance, the average American under 25 years old spends approximately 24% of their gross income on housing.
How much do American’s spend on food? According to the Bureau of Labor Statistics, in 2018, Americans spent 9.7% of their disposable personal income on food.
What does this mean? The chart below demonstrates the annual and monthly food expenses by age based on net income.
|Age||Net Income||Annual Food Expenses||Monthly Food Expenses|
|25 – 34||$61,145||$5,931||$494|
|35 – 44||$75,609||$7,334||$611|
|45 – 54||$83,939||$8,142||$679|
|55 – 64||$71,520||$6,937||$578|
|65 – 74||$50,721||$4,920||$410|
Non-essential expenses include things we don’t need. This is the area with the most money wasting. Examples of non essentials include any high end luxury brand item (think Louis Vuitton, Saint Laurent, etc.), movies, books, video games, and vacations.
The average American spends a staggering $18,000 per year on non essentials, or $1,500 per month. YIKES!
A Step-by-Step Guide for Creating A Budget
Below is the simple step-by-step guide to making a monthly budget for beginners. Think of your budget as a spending plan to help tell your money where to go such as, towards saving, getting out of debt, and paying your bills on time.
1. Define Your Why
Why do you want to learn to create a budget? Do you want to save money? Are you trying to get out of debt? Are you curious where all your money is going? How will living on a budget improve your life?
Defining your why is important because this is what motivates you. Each time you think living on a budget is difficult, remind yourself of why you are doing what you are doing.
Having a strong why is the foundation to success. If you need some guidance on how define your why, check out this article on how to create goals that you can actually accomplish.
2. Gather Your Financial Information
You can make your budget as detailed as you want. However, as a beginner, make your budget simple and easy.
Gather one month of revenue and expenses. The best way to do this is to look at all credit card statements and bank statements. All of this information is available online.
I suggest using excel to put all this information in one place. However, if you are not familiar with excel, then Word, or the classic pen and paper method work perfectly fine. For the purposes of this article, I will be explaining how to make a budget using excel.
Once you open up excel, your first column (cell A1) should describe the name of the vendor, for instance, Target. You will also be tracking both income and expenses in the “vendor” column. Your second column (cell B1) should show the amount spent or earned.
Once you list all of your revenues and expenses in excel, we are going to create categories. Next to each transaction, write down what kind of expense it is. Don’t go crazy with the categories – remember, when you are learning how to make a monthly budget as a beginner, keep things simple.
From your list, look for similar types of transactions. For instance, Income, Housing, Utilities, Car, Groceries, Cell Phone, and Non-Essentials.
Housing Expenses could include things like, mortgage, HOA, rent, insurance, repairs and maintenance, and property taxes.
Car expenses could include things like, lease payments, gas, insurance, traffic violations, and repairs.
Groceries could include things like food for consumption at home (not take-out), toiletries, and cleaning supplies.
While you go through your expenses, if you see something on your credit card, like Target, and you don’t exactly remember what you purchased, you can put this into the non-essentials category.
You may also find it useful to label each expense as fixed or variable. This way, you can easily see which expenses you can work on trying to reduce.
At this point your excel file should look something like this:
These are just some ideas of how you can categorize your expenses. You should customize your categories to the method that suits your lifestyle.
The next step is to find out how much you spent in each category. Add up all the the expenses for each category.
5. Find Areas Where You Can Reduce Your Spending
Chances are, while logging your expenses you found some areas you were spending money on pretty often.
When I first created my budget, I noticed I was spending a lot of money on coffee in the mornings before work and grabbing lunch to take back to the office.
These areas are really easy to reduce. Don’t feel like you need to forgo your iced gourmet coffee in the morning. A great alternative (that I use myself) is to purchase the bags of coffee at my favorite spots, and brew at home. You can invest in a cold brew maker and a french press. Transport your iced coffee in mason jars and your hot coffee in a thermos.
Finding areas where you can reduce spending is actually pretty fun. Don’t feel like you are giving up something, because you aren’t. You are working towards a better life and telling your money where you want it to go. Find alternatives to what you enjoy, get creative.
6. Create Your Budget
It is now time to create your budget. Next to each category, put down a number you think is a reasonable amount to spend. For instance, can you reduce your grocery bill to $100 per member of your household? The number in this column is going to represent your budget. These are the numbers you would like to meet each month.
At this point, your budget should look something like this:
7. Stay Motivated
If you do not meet these numbers each month, don’t worry. There is ALWAYS some one time expense that pops up. Maybe it is a car repair one month, a home repair the next, or an unforeseen trip to the emergency room. There is always something that will happen.
“The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind.” – T.T. Munger
As these types of expenses occur, view them as getting more clarity on your spending. As time goes on, you may find that you need to increase your budget for utilities. That is totally fine.
- One of the biggest benefits of creating a budget is to tell your money where you want it to go.
- Use this step-by-step guide for making a budget that you can actually stick to.
- Don’t get discouraged if you do not meet your budget numbers exactly each month. As you continue to track your spending, adjust your budget to be more accurate. This is a GOOD thing.
- Find creative ways to reduce your spending. Challenge yourself by living below your means but do not deprive yourself to the point of your budget being unsustainable.
- Have questions? Let me know! I am happy to answer.
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