6 Simple Steps for setting up a budget for the first time.
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Years ago, as a college student, and now as a working mom of two kids, I realized how important budgeting was to keep us on track. In fact, I found it very helpful, as it gave me control over my spending, and peace of mind! My hope is that these simple steps for setting up a budget for the first time, will empower you as well.
Why Budget?
Budgeting will help you, and I encourage you to be excited by it! As it will give you control over your spending, provide long-term financial benefits, help you save for your future, and peace of mind!
It is also a guide, a GPS system to stir you in the right direction. Creating a budget can be easy, and it will reduce stress, and help develop
healthy financial habits. It will also reveal areas where money is being wasted.
Finally, debt reduction will be possible.
Allow children to have some input into your family’s budgeting goals, if possible. This gives children a better understanding of the value of money.
Make a commitment to yourself that you will start budgeting today.
Types of Personal Budgets:
There are different methods of budgeting. We use the 50/20/30 method of budgeting here. It is a simple, fail safe plan for budgeting. It will help you get started budgeting. This type of method may not suit every one, especially high income earners.
My suggestion is to be flexible to a certain degree, when using this method. And I would increase the savings percent from 20% to 30% once debt has been paid off.
Once you are comfortable budgeting, I would move to the zero-based budgeting plan, or another budgeting method that you feel comfortable with.
The zero-based method basically means each income and expense has a ‘home’. And your income minus your expenses should be zero.
It doesn’t mean you have zero dollars in your account. It just means every dollar is assigned a place, such as a Savings Account or Insurance or an Emergency Fund.
Another way to budget is by using Dave Ramsey’s Allocated Spending Plan. He mentions this in his book, The Total Money Makeover.
In this method you allocate expenses by pay period, instead of monthly. An advantage of this method is that it gives you a better insight into your budget.
Your Net Worth:
Let’s start by getting a better understanding of your net worth. Your net worth is anything you own of significance.
Basically, your assets (what you own) minus your liabilities (what you owe).
Understanding your net worth is important as it helps you know your financial health, and the financial progress you want to achieve.
Steps to Calculate your Net Worth:
1. List out all your assets
1.List out your largest assets such as the value of your home, cars, rental properties or boats.
Business owners can include an estimate of the value of their business.
2. List out your checking and savings accounts, CD’s and Investment accounts.
3. Include high value items such as jewelry, musical instruments, and antiques.
4. Add up the amounts from steps 1 to 3. This amount is your total assets.
2. List out all your liabilities
1.List out the balance on your mortgages and car loans.
2. List out balances on student loans, and credit cards.
3. Add up the amounts in steps 1 and 2. This amount is your total liabilities.
3. Your Net Worth
1. Subtract the total liabilities from the total assets, to get your net worth. Don’t worry if this number is negative. Look at this process, as just the start in improving your financial health.
2. Every year, calculate your net worth, and compare it to past years to see how well you are progressing in your financial goals.
The 50/20/30 rule:
We will use the 50/20/30 rule here. This is easy to use, and it is the perfect method for those who need flexibility and have an irregular income. This rule is a proportional guide to help you know how your spending and savings are lining up.
This rule works as it makes budgeting, savings and paying your bills simple, especially for those new to budgeting.
With the 50/20/30 rule, a household budget consists of 3 main categories:
- Fixed expenses and Variable expenses/ESSENTIALS – 50%
- Financial Goals/SAVINGS – 20% and
- Discretionary expenses/WANTS – 30%
How to make a budget:
6 Steps for setting up a budget for the first time:
1.Download a Budgeting Spreadsheet (free).
Seedtime.com gives you a list of free budgeting spreadsheets.
Once you feel comfortable working with a budgeting spreadsheet. You can use Mint.com or Personal Capital.
Still others use YNAB(You need a Budget) or Calendarbudget.com
2.List all your monthly household income (Net Income).
This is all your ‘takehome’ pay, which is Income you receive after taxes.
3.Now gather all your monthly expense receipts, and Bank Statements.
TIP: We want our expenses to be less than our Income.
4.List out your bills in the appropriate 50/20/30 section.
We want to list out every expense, as much as we can, this will help us know exactly where our money is going.
- Start with your Fixed expenses and Variable expenses/ESSENTIALS – 50%
Examples of Fixed expenses include, rent, mortgage, utilities, and credit cards.
Examples of Variable expenses include, gas, food, and tolls.
Credit Card expenses are Fixed expenses, if you carry a balance on them each month. If you pay them off each month, they are Variable expenses.
- Now list out your Financial Goals/SAVINGS – 20%
Examples include: Savings and Emergency Fund Account, saving for a down payment, and Additional Debt Reduction Payments (these are in addition to the credit card payments you are making in your fixed expenses).
The Emergency Fund Savings is for unexpected emergencies such as medical expenses, and car repairs.
This prevents these emergencies from affecting your budget.
By setting up a budget, you have taken the first step towards moving your life in the right direction!!
- Finally list out your Discretionary expenses/WANTS – 30%
Examples include, gym memberships, and entertainment.
Budgeting for clothes or entertainment while not the most important, is still recommended. As it is likely to make us want to budget.
The important thing to remember here, is that we do this in moderation.
If your expenses are higher than their income. Don’t worry, you aren’t alone. Start by looking for areas where you can cut some unnecessary expenses, especially areas of your variable and discretionary expenses.
TIP: Look for ways to cut your Discretionary and Variable expenses.
Keep doing this till you get your expenses down, as much as you reasonably can.
Look for ways to save on groceries, or by cancelling memberships that you don’t use often.
TIP: Your total expenses should be less than 75% of your total net income.
TIP: Automate your Savings sections.
As soon as you get paid, money needs to go in automatically (such as a direct deposit) to certain Budget items, such as tithing, savings, retirement account, children’s college funds, and emergency fund account.
These items are super important and automating them will help.
TIP: Automate certain Bill Payments.
This is especially useful for busy folks. As it avoids late fees, which can really hurt your budget.
I learnt the hard way how these late fees can quickly add up.
TIP: PAY MORE THAN THE MINIMUM ON CREDIT CARD OR LOANS, AS MUCH AS POSSIBLE.
As the longer you have these bills, the more interest that you will be paying on them!
OPTIONS TO GET RID OF DEBT:
Some options to get rid of Debt include:
- Dave Ramsey’s Debt Snowball Plan.
- Set Debt Payoff goals, using this Debt Reduction Article and Spreadsheet, from loveandmoneymatters.com
5. Make sure you check your Budget often.
- To see if bills that were due, or have been paid on time. Check slightly before the 1st and the 15th of each month.
- Your budget needs to be adjusted for upcoming events such as Back to School items, Christmas, etc.
6. Keep copies of your bills for several months to several years.
You can write the date you paid a particular bill, before you file it.
Summary:
The advantages of budgeting are many as you can see above. Setting up a budget for the first time will take some time, but it will get easier in about two to three months.
To Recap:
- Download a budget worksheet.
- List your different sources of income.
- Using the 50/20/30 rule enter your expenses in either of the 3 categories.
- Get rid of debt using a Debt Snowball Method.
- Automate your Savings.
- Automate certain Bill Payments.
- Check your budget often.
- Keep copies of your paid bills.
- Be flexible, and adjust the percentages to increase your savings!
Using the 50/20/30 rule will definitely help get you started on the right track. A variant is the 50/30/20 rule that puts 30% in savings with 20% going towards discretionary spending.
Stick with budgeting, as the payoff is really worth it! You can make it happen! And once you are over the initial hump, it will become almost second nature to you.
You can do this!! You are so worth this effort!! And you will reap the rewards of budgeting for years to come.
Here are images of the books/CDs/DVDs that I recommend:
How has budgeting improved your life? Please share your comments below.
