Budgeting Baby Steps: A Step-by-Step guide to Starting a Budget and Taking Control of Your Money
When I was 18, I left for college bright-eyed, bushy-tailed, and with enough ego to just about guarantee something would go wrong.
A good student in high school, I was also blessed enough to have scholarship money to cover all my expenses for the next four years.
Theoretically, at least.
As you might expect, a semester of partying with my friends and missing classes meant that I lost over half of my scholarships when my GPA got too low.
Want to know how I found out that I lost my scholarships?
It was at midnight, on the day I was supposed to be signing up for the next semester’s classes. I was sitting alone in the empty lobby of my dorm, sobbing as a big, red HOLD message prevented me from registering.
With no job and only a little graduation money hidden under my mattress, I was convinced that college was over for me. How was I supposed to continue if I couldn’t even pay my tuition, let alone afford rent and food?
I felt helpless.
Fortunately, thanks to some familial support and access to a small student loan, I was able to get back on my feet soon after. I got a job, worked hard to raise my GPA, and regained a scholarship that let me finish school without more loans.
Most importantly, I developed a system to manage my finances so that I could prepare for life events rather than just react to them. And the key to this system was a strong budget.
A budget, in its many forms, is essentially a financial plan for the future. It organizes your money, and helps you decide where to place each dollar. As an added benefit, it creates a blueprint for your financial goals and a clear path to the things you love and value most.
Everyone – and I mean everyone – can benefit from a budget. Whether it’s a pen and paper tracking system, a spending diary, or the aptly named Anti-Budget Budget (not recommended for beginners), there is a system that can easily work for you.
I love simplicity. And a simple budget can make anyone happy. You don’t have to plan out your spending for the next five years down to the last penny.
A plan that is too restrictive or too complicated is bound for failure.
Instead, find what works best for you and go with it. A budget doesn’t have to be complicated or scary.
A few simple principles, a few hours at the kitchen table by yourself or with your partner, and a bottle of wine and some pizza are all you need to start whipping those finances into shape.
To help you get going, here’s some steps you can take to start.
Step 1: Track your past expenses and income
Past behavior is the best indicator for future behavior.
Before you can plan your finances, you’ll need to know what your past spending looks like. For this reason, tracking your past transactions is the first – and arguably one of the most important – steps.
Choose a timeframe to work with – preferably something not too long and not too far past. The past three months are a great place to start. Gather all your records for transactions during that period, whether it’s cash, credit, debit, or income. Then, separated by month, assign each transaction a category based on what it was for.
There are some basic categories just about everyone will use, like housing, transportation, food, insurance, entertainment, clothing, medical, miscellaneous, savings, and income. Beyond these, you can have as many or as few categories as make sense for your situation. As a preference, I also like to include financial goals, like saving up for a new couch, and things that aren’t monthly expenses, like software subscriptions, that I can save up for a little bit at a time.
Essentially, you’ll just need the date of the transaction, the category, and the amount, so using a pencil, some paper, and a calculator will do the trick. Microsoft Excel and Google Spreadsheets are excellent tools for this, as well.
If you don’t want to make your own spreadsheet, I also offer a free 3-Month Transaction Tracker on my website here that has preset categories (and room to add your own) and automatically does most of the analysis of your spending that I’ll ask you to do in the next step.
Step 2: Analyzing what you’ve found
Once you’ve categorized your past transactions, you’ll need to add it all up, separated by month and category. For example, if you spent $100 at Kroger and $200 at Walmart in October, then your October grocery budget is $300. This is done automatically in my Transaction Tracker, with your results clearly presented on the Analysis page.
It’d also be beneficial to calculate an average amount spent in each category – done by adding up the category monthly totals and dividing by the number of months.
At this point, you’ll have a good snapshot of what your spending typically looks like. Take a moment to look this over. Note where your money is going and decide if that aligns with your values and goals.
Are you happy with your financial picture?
Most importantly, are your monthly expenses more or less than your income? If you spend more than you make, you have what’s called negative cash flow in your financials. You can begin to fix this by either reducing expenses, increasing income, or both. If you continue in the negative, you’ll likely find yourself reliant on debt and in a place of financial helplessness.
If your expenses do not exceed your income, congratulations! You have positive cash flow! Improve your standing by following the wealth-building formula: increase income, reduce expenses, or both.
Step 3: Find your system
Finding a comfortable system of budgeting is very important to its success. It will take time.
Some types of budgets may not work for you while others work really well. Also, budgets constantly evolve, so the system you start out with is unlikely to stay the same for long. It’s ok – and even encouraged – to let this happen.
As your habits, values, and needs change, so will your budget.
A great system for first-timers and those who struggle with budgeting is the Envelope System. The main idea is that each category has its own “envelope”. You put a certain amount into each envelope at the beginning of the month and, when the envelope is empty, you stop spending.
You have a couple different options with this system. There’s staying strictly to the system by using physical envelopes and cash. Or you can use a digital format, like an excel file or budgeting software.
One of my favorite budgeting tools is an online, digital envelope system called YNAB (You Need A Budget). It allows you to easily allocate to your categories each month, then – if you want it to – it connects to your bank account and makes you categorize transactions as they show up on your account.
Step 4: Spread the funds
It’s time to decide how much money goes into each category. Everyone’s situation is different so this step may vary person to person. You all find joy in different things, too. Pursuing your joy – whatever it may be – is one of the greatest and most fulfilling things you can do. This can be reflected in your budget, too.
This is exactly why I’ll say to pay yourself first! Your first step in allocating your funds is to give some love to your goals and values.
Your savings, investments, or hobby fund are all included in this. Even if you can only put a small amount into these joy-filled and wealth-building categories, paying yourself first will put what matters the most right up front in your mind.
Next in line are the monthly essentials, the things that have to be paid each month, like mortgages, rent, utilities, insurance, and car notes. Hit these categories so that you can make sure your bases are covered.
The next place you’ll allocate to are the categories that are necessary but can be a little more flexible. Groceries and transportation are included in this.
Last, you’ll cover those fun or not-monthly-expenses categories, like clothing, entertainment, and software subscriptions.
If there’s anything left after that, use the funds to bulk up some of your categories or pay yourself first (again). If you ever get stuck and aren’t sure how much you should put in an envelope, look at your averages from your tracking analysis to give yourself an idea.
Later in the month, you may go over budget in a category. If this happens with the Envelope system, you can move money from one envelope to another. Keep in mind that there is an opportunity cost – you will be losing money you can’t get back in one of your categories. If this ever happens, you’ll need to adjust your budget so that the under-budgeted category will have more allocated to it next month.
Step 5: Go forth and conquer
You have made the first steps to taking control of your financial future.
You have a budget. Look at and admire it. Ok, stop.
A budget has more purpose than to sit there and look pretty. It’s not going to do anything unless you put in a little work.
It’s going to be hard to stick to your budget. And hard to have that resolve to say no sometimes.
I’ve had a budget for years, part of my job is being a financial coach, and I still have trouble saying no to late night burgers with my husband.
But that’s ok.
Because you know what I’m doing next month? I’m going to raise our entertainment budget just a little bit.
Sure, I won’t be buying a new shirt next month, but I’m going to have one heck of a burger with the person I love most.
So go out. Try, grow, and pursue your joy. You’re gonna do great.