Budgeting Basics: What You Need to Know to Get Started

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To most people, “budget” is a negative word: a barrier against the enjoyable things in life. Ask a person to use the word in a sentence and it’s likely to sound something like this: “Sorry I can’t go see the latest movie with you, but it’s not in the budget.”

Cue the tragically sad violin music.

To me, the word is positive. Why? Because a written and detailed budget allows for a personal finance plan that has room for both bills and entertainment.

Let’s try “budget” in a sentence again. “I’d love to go see that movie with you. I’ve budgeted $100 for entertainment this month. Please let it be my treat!” Better, yes?

8 Steps to Building a Better Budget

Unfortunately, many of us freeze at the thought of putting together a budget. How much are my actual bills? What about irregular income? What if I learn something bad about my finances through budgeting?

Take a deep breath, people. With the advent of online programs, budgeting has never been easier. No longer is it necessary to fill pages with chicken scratch or have an accounting degree to put together a working and functional budget.

With this step-by-step budgeting guide, you’ll be on top of your finances in no time at all!

Step 1: Ask Yourself Why

Unless you have a concrete reason why you’re putting together a budget, you’re doomed to fail. Are you working towards paying off your student loans, saving towards a house or knocking out your credit card debt? Knowing the why will make the how exponentially easier. Figuring out your big picture goals will put any sacrifice into perspective.

Step 2: Collaborate

Collaborate with your spouse if you’re married. No budget has a chance of success if all family members aren’t on board. Discuss what’s important to each of you and really listen to one another’s perspectives. A functional budget incorporates each person’s priorities. Again, talk about your big picture goals.

Step 3: Choose a Budgeting System

No need to reinvent the wheel here, as user-friendly budgeting programs abound. Whether you choose You Need a Budget (YNAB), Mint, an Excel spreadsheet (or Google Sheets), or even a simple pad of paper, pick one method and then stick to it. One chosen system will work 100% better than choosing nothing at all.

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If you’re not sure where to start, read Team Clark’s guide to the best budgeting apps.

Step 4: Gather Up Your Bills, Income Source Records and Miscellaneous Expense Information

This might seem like a pain, but you only have to do this the first month. It’s important to include every single expense and expenditure. This might seem finicky, but it’s the key to a successful budget.

Unsure where to start? Look through your credit card bills, bank account statements and that teetering stack of bills in your dining room. The first month’s budget is likely to be less than perfect, but that’s okay.

Add categories you may have forgotten about to your budget as the month goes on to complete a realistic financial picture. This step might be on the uncomfortable side for you, but that’s okay too. You can’t get past the boogie man until you face your fears.

Knowing how much you earn, spend and owe is the point of a budget and a necessary step. Knowledge is key.

Step 5: Be Honest

Be honest with yourself. You might be tempted to put just $300 into the monthly column for food in order to balance the budget, but unless you have a time machine back to 1964, that’s probably not a realistic figure. And unless you’re honest about your numbers, you’re only setting yourself up for failure.

Step 6: Be Willing to Sacrifice

In order to move toward those big picture goals, you’ll probably need to make a few sacrifices. Cable TV, frequent restaurant meals and extravagant gift-giving may need to take a back seat to important goals such as debt reduction and retirement planning.

Step 7: Make a Distinct Budget for Each Month

Yes, your rent or mortgage should be the same each month, but there will be expenses, and possibly income, that vary throughout the year. Consider these items: heat, air conditioning, birthdays, garage sale income, school expenses, overtime, vacations and work bonuses. Most of these fluctuations can be anticipated.

Step 8: Keep at It

Keeping a budget is a lifelong habit that needs to continue throughout adulthood. Budgeting isn’t just for people in dire financial straits. It’s an important tool for anyone looking to achieve financial success. Be deliberate with your money. Be smart with your finances. Stay smart.

Final Thought

I’m a personal finance writer but embarrassingly didn’t start budgeting until last year. Why? I thought my husband and I had no problem with impulse spending, so I figured budgeting was a lot of work for minimal gain. Boy, was I wrong!

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What my husband and I have gained from the experience has been incredibly valuable. No longer are we anxiously wondering which bills have been paid and which haven’t. We now know at a glance exactly what we need to pay each month and what’s already been paid. So easy. As a result, with minimal sacrifice, we’re now able to sock away thousands of dollars each month for our sons’ college expenses.

Where was our money going before we started budgeting?! I’m not entirely sure, but what I can be sure of is that tracking and planning our money has freed up our finances and given us tremendous peace of mind. Budgeting took away the financial worry that impelled me to check our credit union balance multiple times per day. Budgeting gave us financial freedom. And in my book, that’s a positive thing.

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