Budgeting 101: The Basic Tips to Improve Your Finances

One of the best ways to start improving your finances and master money management is through the basics: budgeting 101

Budgeting 101While it might not be the most fun to calculate your numbers and figure out how to spend and save money — it’s also critical early on in your journey.

By understanding and creating a personalized budget, you take control of your money and create a roadmap that will help you succeed now and in the future. 

But what are the budgeting basics? How do you get started and are there different types of budget styles?

Don’t worry, I’ll cover everything you need to know in this budgeting 101 guide below.

What Is A Budget?

A budget is a plan that helps you manage your income, current expenses, and helps you save for your goals over set periods of time. With a budget, you have a plan for your spending and understand where your financial health currently stands.

Some people prefer to create a budget via writing it down on paper, while others like using an Excel spreadsheet or a personal finance app or software. For example, creating a budget calendar is a solid option.

Who should be budgeting? 

Budgeting is an important tool for every person who’s earning and spending money (so pretty much everyone). It’s an activity that helps you remain in control of your money, stay on track with your goals and keep away from financial stress

And understanding budgeting 101 will help you improve your relationship with money and offer you an accurate picture of your financial life. It’s a tool to help you get out of debt, save for your future and be prepared for any unexpected challenges.

Often people assume they know their current finances and how much they are spending. I also felt that way a few years back. However, when I really sat down and looked at the numbers, I was way off and surprised at the amount of wasteful spending I was engaged in.

Budgeting for Beginners Basics

If you’re a budgeting beginner, here are some of the steps to help you get started in the world of budgeting. Naturally, you can build a more complicated and in-depth budget — but keeping it simple can also improve your finances significantly. 

1. Calculate monthly income

The first thing you’ll want to do when you get started with your budget is get your monthly income together. Knowing accurately how much money you make per month can help guide your decisions.

When you figure out this amount remember to look at your take-home pay after taxes if you have a regular W-2 job. If you have several income sources, add up everything you earn after taxes together to get your total monthly income. 

2. Add fixed expenses

Once you’ve calculated all your income, you’ll want to add up all your fixed expenses. Those would include how much you spend on rent or pay for a mortgage, student loans and car payments. These are expenses that you pay regularly every month and don’t fluctuate too much. 

Don’t forget variable expenses

You also cannot forget about variable expenses — those that are not as predictable and could vary month to month. This could be anything like utility bills, grocery costs, entertainment, paying for gas, etc. 

Take a look at past bank statements and payments to get an average for those. Then typically, I like to add 10% – 15% extra to what the average cost per month is on those. As you might be less or higher on a given month, this gives you some wiggle room.

3. Allocate your budget

Subtract your fixed expenses from your monthly income and this is the total dollar amount you have leftover to spend and save for the month. You then want to allocate this remaining amount to your “wants” and savings or other investments. 

Be realistic with how much you spend on each category: once you run out of money for one category, you won’t have any money left if you want to stick to your budget.

If you’re not sure how much to allocate for each category, check your bank statements over the past months to see how much you usually spend.

4. Monitor your progress

Although you have set up your budget and understand your numbers, a core part of budgeting 101 is to continue to track your progress. 

Often, it’s easy to get started but then fall back into old financial habits. Instead, it’s important you dedicate time potentially each week to go over your plan, spending, savings, etc. for the past week. 

Additionally, your goals will change overtime and so can your income or expenses. Which means how you allocate your money will need to be altered as well. Keep tabs on your progress and revising your budget can ensure you don’t fall behind! 

5. Record your spending habits

One of the main reasons for a budget is to take control of how you spend money. I’m not one to say you should never spend money on things you enjoy, but it’s about living within your means. With credit cards, it’s easy to not even think about the costs of things and the accessibility of shopping online doesn’t help either. 

In your budget, whether you are manual writing this down or using software to help, record your spending meticulously. Yes, it can be tedious but if you know you have a spending or debt problem currently — it can be a financial lifesaver!

Over time as you get better with finances and managing your money, you can probably step back a bit. 

6. Lower fixed expenses

If you realize that your expenses are too high and that sticking to a budget will be difficult, it’s time to look into lowering your expenses. 

Start by looking at your fixed expenses: is your car payment too high? Could you maybe refinance your house? Or move to a lower cost of living area? 

Lowering fixed expenses will decrease the pressure on your budget and free up more money to focus on goals such as paying off debt or saving for retirement. 

7. Manage wants

Look at previous bank statements and see if there are any categories where you are overspending on. Are you spending too much on gas? Or on nights out?

If there are certain categories where you think you could cut back, it’s worth trying to lower your optional expenses so you can free up more money.

Wants are the reason many overspend and wreck their budgets or cause more debt.

8. Save for goals

Why are we freeing up all that money? To save for goals!

Your financial goals will depend on your own wants and needs. These are goals that help you focus on the bigger picture and prepare for the future.

This could be paying off your student loan debt, saving up for a house deposit or reaching your financial independence number! 

Budgeting Tips

Types of Budgeting Styles to Consider

Now that you understand the budgeting basics, there is still another part to consider before diving in — what type of budget style is right for you?

As with most areas in finances, how and what you do depends on your personal situation and goals. 

One budgeting style might be a better fit for you than the next person. So, there are no right or wrong options when it comes to the types of budget you might want to explore.

Here are a few budgeting methods you should understand and consider when starting. 

Simple Monthly Budget

In the budgeting basics above, I generally referenced the most common budgeting style. The traditional monthly budget is also one of the more popular budgets people tend to choose. 

You simply need to list all your income, your expenses and then manage what’s left. If there isn’t much of a difference, then you can focus on either cutting back on some expenses, or increasing your income.

The monthly budget is good for people who want a simple budget without too much of a hassle and upkeep.

Envelope Budgeting

The cash envelope budgeting system is a much more creative and physical way to manage a budget and control your spending.

With an envelope budget, you set aside a specific amount of cash every month to every category and keep it in a separate envelope.

You want your cash to last your entire month — if an envelope is empty, you won’t be able to spend any more money if you want to stick to your budget.

It’s simple to set up: you just need to get a few envelopes, add some labels and then fill it with the cash you want to spend on each category. This budgeting method is great for those who prefer physical cash and straightforward budget limits. 

Zero-Sum Budgeting

The Zero-Sum budget is a budget that focuses on allocating every single dollar in your account. This way, you won’t be overspending on any category and no dollar is wasted. 

Once you receive your after-tax paycheck, you just need to plan where every dollar goes so that at the end of the month you’re left with nothing. 

This is a great budgeting strategy for those who want peace of mind that no dollar is going to waste.

50/30/20 Budget

This budget is a rule of thumb to help you allocate your budget appropriately if you don’t know where to get started. It’s simple to follow:

  • 50% should go to needs, such as rent, car payments, insurance, and groceries.
  • 30% should be allocated towards wants, such as entertainment, eating out and vacations.
  • 20% is the amount you want to be allocating towards your goals, such as paying off debt and saving for retirement.

The 50/30/20 budget is a good place to get started if you’ve never done a budget before and is stronger than the monthly budget option. However, remember that a rule of thumb is a generalization and therefore may not work for every person.  

I used this in combo with the monthly budget, but I flipped the percentages a bit. I used 30% towards my savings goals and investments. Then 20% went to wants, as I felt I needed to play catch-up a few years ago and be a bit more strict. 

Budgeting Software And Apps

Budgeting software and apps make managing your money a little more fun and easier to handle. They’ll help you stick to your budget, and some even come with some features to help you save more. Plus, there are plenty of visual elements that help you navigate your financial health. 

There’s plenty of other personal finance software and tools you can test, but the below are some that are my personal favorites that guide you in your budget.

Check these out below and see if they can assist you in your budgeting and money saving needs.

Savology

Savology is a personal finance software that analyzes your finances and creates a free personalized plan along with actionable steps to help you reach your goals. 

The software focuses on giving you both a plan and a budget, and will help you keep track of your retirement, car payments and any other fixed payments. 

Savology also creates and offers a report card that will assess how you’re doing in every category according to its “financial performance indicators.”

Tiller Money

Tiller Money is a financial software that will help you create a budget with spreadsheets. The platform syncs with your bank account transactions and then puts the information together on a separate spreadsheet.

You’ll be able to personalize the spreadsheet, choose from a ton of pre-built templates, and have the option to save your data offline for $79 per year. 

Mint

Mint is one of the oldest and well-known online budgeting tools out there. It automatically syncs and categorizes your transactions online and then helps you budget through their platform.

You have the flexibility to add your own categories, split transactions and even set alerts when you’re overspending on a budget category. Mint also offers credit score monitoring all for free.

You Need A Budget

You Need A Budget is another well-known personal finance platform and is a great to get started with as a beginner. It syncs with your bank account and then allocates your spending into various categories.

You can share your budgets across various users, and the app works on laptops, smartphones and tablets. The app calls itself an “accountability partner” and will also let you know when you’re overspending on your budget.

They offer a free trial for over 30 days, but will then cost you $11.99 per month to continue. However, it is one of the most powerful budgeting software out there. 

Personal Capital 

Personal Capital is a useful personal finance program that will help you manage your investments as well as your budget. 

It’s mainly designed to track all your investment accounts including your 401ks, IRAs and all your mortgages and loans. It can also check and monitor your checking and savings accounts. 

Over time, Personal Capital will let you know how your  net worth is doing as well as your portfolio.

Qapital 

Qapital works as a banking app that makes it easier to save money and control your spending. It puts your spending into various categories and also offers a feature called “Round up”. 

This means that on every purchase it rounds up the total amount to the nearest $2 dollar and saves the difference. With this feature, Qapital also helps you set savings goals and budget your spending. 

They also offer a feature that allows you to set up automatic contributions to specific goals.

Mvelopes

Mvelopes is a budgeting app that follows the envelopes budgeting method mentioned above. Mvelopes makes your envelopes digital: it creates a digital envelope for every category and then turns to red when one is empty. 

Depending on your needs, you can buy several tiers of the Mvelopes app, with the Plus tier including consultations with a personal finance coach.

The Challenges of Budgeting

1. A little boring

The act of managing your budget can sound a bit boring, and restricting yourself in order to lower expenses can also make life a little less exciting. However, once your budget is set up, managing it doesn’t need to take more than 30 minutes per month. 

The important thing to remind yourself is how impactful it can be to improving your spending habits, increasing your savings, and helping you get out of debt. If you keep that as a reminder to yourself, it can help motivate you.

2. It can be overwhelming

If you’ve never done a budget or even managed your finances before, budgeting can be a bit overwhelming at first. This is because you’ll need to assess your situation, adjust your spending and crunch some numbers.

While the math isn’t too challenging, it will require you do get organized and face the reality of your finances. 

If you’re worried about what to expect this can cause some financial stress and make budgeting sound like a chore.

3. It can create a scarcity mindset

Many believe that budgeting is about tracking every penny and hoarding as much money as possible. Many people end up falling into a scarcity mindset where they try to stick to within their budget at all costs. 

You might end up afraid you aren’t doing enough, saving enough, or working on budget too little and you become a bit obsessive. That can lead to an unhealthy mindset and lifestyle. 

Remember that budgeting can be adapted to your lifestyle, and treating yourself every once  and while doesn’t have to be something negative. You can still save money and work on your finances, but also live a little and enjoy life. 

4. You may feel stingy

While living on a strict budget you may start feeling stingy or even cheap since your monthly expenses may be considerably lower. 

If you’re not used to this, you may feel stingy and feel like you’re sacrificing your happiness. However, over time you do get used to compromising and spending less money. And it can be a good strategy to start, but it doesn’t mean you need to become completely cheap. 

5. Difficult to say no or control spending

One of the hardest parts of budgeting is saying no in order to stick to your budget. This is especially difficult when it involves a social event, or something that you really enjoy doing. 

If it’s a one-time expense such as going on a trip or a nice dinner, spending the money won’t be so bad. But if it becomes something regular, it’s bound to affect your budget!

Final Thoughts

What budgeting style and how in-depth you want to go will be up to you, your family, and what your financial goals are. Over time you’ll become more financially literate and you can slowly spend less time on budgeting. 

For example, these days I have a very simple budget I look at once a month and update typically twice per year. But in my early days of getting my financial life together, I was monitoring it weekly. 

Hopefully this budgeting 101 overview was helpful and begins to lead you to a path of future financial success.