What do you think when you hear the term budget? Perhaps you think to yourself:
“Yuck, I don’t want to spend time on that” or maybe
“I don’t need to budget, I just go with the flow” or perhaps
“A budget is too restricting and unnecessary”
What is a budget
A budget is simply a tool used for money management. I consider it to be similar to a blueprint for a construction project. They are a plan for how you envision things to go. A budget is a template used to show how you will allocate any money you have coming in.
Why a budget is critical to financial health
While all of those reasons up above may seem valid on the surface, don’t let them fool you. Creating budgets are an essential part to money management. With my experience doing budgets for a publicly traded company, I can assure you that they are critically important to the overall success of an organization.
A publicly traded company has thousands to millions of shareholders of stock in companies. And every single one of those companies has a budget and a budgeting process. The team that does that process communicates with leaders of the company to set it and ultimately settle on numbers. Then there’s a team dedicated to explaining variances to that budget.
For individuals it should be no different. People need to know where their money is going and where it should go in the future. If you ignore the budgeting process, you have less control over your finances, and that leaves the door open to big problems down the road. If you aren’t sure where to start, let this be a guide on creating a budget for beginners.
Easiest way to start a budget for beginners
Budgeting does not have to complex or confusing. There are a ton of budgeting apps and programs out there, and it can be overwhelming for a beginner. But, it doesn’t have to be. Here are some simple steps to start:
- Approach to money: The first step is deciding what your approach to money is. Do you know what your money personality is? Many experts tend to think in relationships there is a saver vs spender. While I don’t necessarily agree this is true, there is a lot of truth to that to some degree. Are you someone that is more concerned with looking towards the future and saving? Or are you happier with the here and now and trying to take a YOLO (You Only Live Once) approach to life? Neither one is right and wrong, but its important to know how you approach things.
- Goal setting: Do you know what your goals are in life? For your relationship? If so, then great. If not, then check out my tips on setting effective goals because this needs to be addressed before you worry about budgeting.
- Pick a tool: How do you want to track your finances? I’ve coaches people that write it down on paper with a pencil and I’ve worked with people who use sophisticated apps on their phone to detailed excel models on their laptops. End of the day, the best tool is the one that works for you and your situation. My personal preference is Microsoft Excel, because I use that every day in my career. But what works for me might not work for you.
- List your accounts: Whatever method you use, gather up a list of your main accounts. I’m talking cash savings, checking, credit cards, car payments, mortgage statements, etc. Many apps these days can connect to these accounts electronically, but you will still need passwords to do so
- Start assigning dollars: This process is not a perfect science. But the point of budgeting is any income you make should get assigned to something.
Common methods to budget for beginners
- Zero Based: this is the method that Ramsey Solutions and You Need a Budget teach. The budget must equal zero for every month. Like mentioned above, every dollar gets assigned to something.
- Traditional: this is more similar to an income statement, where you list your income, then your variable expenses, then fixed expenses, etc. and whatever is left is your net income.
- 80/20 method: this is considered to be the Pay Yourself method where 20% of income goes into retirement, and the remaining goes to other expenses.
- 50/30/20 method: 50% goes towards needs, 30% to wants and 20% to savings
How to stick to a budget for beginners
There really isn’t a set way to explain this, but know that a budget, while it is an effective planning tool is just that, a tool. Like a business still has to execute on their plan, you have to execute on your everyday tasks to achieve what you set out to.
Also remember that life happens, things always come up that you don’t expect. It is important to remember that your budget is not set in concrete and can always be adjusted.
Finally, just because you have more control over the numbers with a budget doesn’t mean you should stress constantly over the numbers. I am probably guilty of this part myself. When inflation strikes and costs everywhere rise, they put a strain on the budget. But don’t let that discourage you from utilizing a budget properly.
