Budgeting Tips for Beginners

A budget will help ensure you do not spend more than you make.

A budget allows you to understand what is going into the bank, and more important what is going out in terms of spending. It can prioritize where money has to go, and where money can go. And it helps develop good financial habits.

In addition to ensuring there is enough income to meet expenses, a budget helps with financial planning, savings, achieving financial stability and reaching financial goals.

In short, a budget provides a snapshot of your financial situation, on a monthly basis.

While all of us should use a budget, budgeting is especially important to young people starting their financial journey.

Knowing how to budget is important not just for the present, but for the future as well.

1. Track Your Spending

The first step in setting up a budget is tracking spending. This means tracking everything, including the $4 latte or $9 avocado toast.

It’s best to do this over a three- or four-month period, so have bank and credit card statements as well as a record of cash expenses handy. Break down expenditures by category, and be sure to include Dave Ramsey’s four walls: food, utilities, shelter (home or apartment) and transportation (car payment, gas, subway costs, etc.)

It’s also important to keep detailed information, so keep different categories for groceries (food prepared and eaten at home) and restaurants (food eaten outside the home).

If you’re handy with Excel or Numbers (Apple), a budget could be created with those apps. If you’d prefer someone else do the setup work, there are several budget apps available to help – from EveryDollar to Quicken Simplifi to Fudget to Copilot.

Taking this first step creates a clearer understanding of spending habits and helps identify areas for improvement.

2. Set Clear Financial Goals

When creating a budget, it’s important to be smart, which means following SMART principles, which refer to five tenets of budgeting: Specific, Measurable, Achievable, Relevant and Timely.

Here’s what each refers to:

• Specific: This means being honest about why you are saving. Whether it’s for a vacation, a dog, an emergency fund or holiday gifts, it’s important to be specific about goals and expectations.
• Measurable: This isn’t complex. It simply means ensuring any goals are easily measurable and trackable. That allows you to monitor progress, and even feel good about how you’re using money.
• Achievable:. Ask yourself: Is this truly achievable? Trying to save $2,000 per month on a salary of $40,000 per year might be laudable, but it’s not realistic. Be honest with yourself, focus on necessary expenses (which we’ll explain) and keep the other goals credible.
• Relevant: An overall financial plan should include using money in necessary and important ways. A European vacation may sound nice, but it may not be reachable when trying to build an emergency fund while paying bills.
• Timely: Creating a timeframe to achieve a financial goal allows you to monitor progress and see how close you are to completing the goal. Once it’s achieved, a sense of satisfaction follows. Setting an unachievable goal leads to frustration.

Budgets are about choices. The first choice is to ensure necessary bills are paid. From there the choices become more personal. All should point toward setting financial goals, and reaching them.

3. Create a Budget Plan

The best way to create a budget is the one that is right for you. Three of the most common budget plans are zero-based budgeting, the 50/30/20 rule and envelope budgeting.

Zero-Based Budgeting

If it’s confusing, one place to start would be with zero-based budgeting. This means expenses subtracted from income equals zero. If you take home $4,000 per month, zero-based budgeting means expenses are $4,000.

This approach does not mean no money is saved. Any budget should have a category for savings, both short-term (a new bike, new patio furniture) and long-term (money set aside for a down payment on a house, or a special vacation).

Figuring a zero-based budget happens this way:

• List income: Be sure it’s after-tax income.
• List expenses: Put them in categories, and be sure to include necessary expenses that include items such as rent, utilities, transportation and savings.
• Subtract expenses from income: This likely won’t equal zero on the first try. If there’s money left over, that can be added to savings. If there are more expenses than income, it’s time to adjust the amounts in some categories to bring the total to zero.

The 50/30/20 Rule

Another approach to budgeting is the 50/30/20 rule. This means budgeting 50% of income for needs, 30% for wants (that new TV perhaps) and 20% for savings and debt repayment. Let’s break that down further:

• 50% for needs. This means essentials. Housing, utilities, transportation, insurance, child care, and the minimum loan or credit card payment fit here. Anything you must pay to live is part of the 50%.
• 30% for wants. This can be a tough call. A new TV seems like a clear want, but a gym membership that benefits mental and physical health could be a need. Careful assessment is required.
• 20% for savings and paying down debt. Having a growing savings account is important, as is a growing retirement and emergency account. Using specific budget money to eliminate credit card debt provides long-term benefits for financial health.

Envelope Budgeting System

If you need more than just numbers on a page, the envelope budgeting system is an option. This entails putting the actual amount of cash budgeted for categories in an envelope. Once the envelopes are empty, stop spending in that category. How does this work?

• Create a budget.
• Create envelopes with categories. This can be specific categories like groceries, electric bills and car payment, or it can be more general like essentials, wants and savings.
• Stop spending when the envelope is empty.

While this approach can work for some, for many it’s dated. That’s why the GoodBudget app took this old budgeting system into the digital world. The app is worth a look if you like the system, but want a more modern way of implementing it.

So, what’s the best approach for budgeting? The answer is whichever one gets you engaged with your finances. What matters most is taking the time to create the budget.

4. Prioritize Needs Over Wants

As we have described, needs have to be taken care of and paid for. If you don’t make house payments, you could lose your home. If you don’t pay rent, you could be evicted. Electricity and gas can be shut off if payments are not made.

Another word for needs is essentials because it’s essential to pay those bills.

So when budgeting, make paying the essentials the top priority. Cheating and shifting rent or utility money toward that new TV is pointless if the rent isn’t paid.

Budget choices apply to some categories. It’s essential that we eat. However, we don’t have to eat at restaurants three times per week. Budgeting properly for groceries prepared at home can lead to extra money for savings or retirement accounts.

We’ll discuss emergency accounts more, but when it comes to retirement accounts, it’s wise to think of them as essential. As soon as you can, budget as much as you can afford for retirement savings, whether it’s an IRA or a 401(k) plan through your employer.

5. Use Budgeting Tools and Apps

If the idea of creating a budget is intimidating, do not fret. You are not alone.

That is why it can be helpful to take advantage of the digital world and consider an app for budgeting.

While every budget app has unique characteristics, its main impact is to ease the process of creating and following a budget. The apps can even link to your bank or credit card accounts to record new purchases and debit card transactions.

All budget apps will track spending by category. Most categories are set up for the user, though additional ones can be added.

Some budget apps allow for automatic bill payments and will send reminders on due dates for bills. They also encourage savings by setting up ways to save and can have scheduled transfers into a savings account.

The best budget apps provide a healthy amount of support.

6. Automate Your Savings

Consistent and regular contributions to savings accounts – including retirement accounts – are an excellent way to build savings for future needs. Many experts advise saving 10% of pretax income, and automatic savings can come right out of your paycheck.

If your employer has a 401(k) retirement account, it’s wise to sign up. Money is directly deposited by the employer into the 401(k), and many employers will match part or all of the employee contribution.

If you contribute 5% of your salary into the 401(k) and the employer matches that contribution, you’re saving 10% of earnings – and it only costs you 5%. Contributions to a 401(k) account are pre-tax, which means you will not pay taxes on the contributions.

If you have a regular or Roth IRA, you could set up similar regular deposits through the broker that handles the IRA. For those without a 401(k) plan, this is a wise decision.

Other savings goals also can be achieved with automatic deposits. An automated deposit from your pay into a savings account can be set up. This is known as “paying yourself first.” The same is true of an investment account. Regular deposits could be transferred from earnings to investment accounts, which puts the money to work.

One option is an app like Acorns. Acorns “rounds up” purchases from a debit card and/or bank account – you choose which – and once they reach $5 are deposited into an investment account. This is an easy way to save, especially for those just starting their financial journey.

No matter how savings are achieved, the key is automating savings, which ensures consistent and regular contributions.

7. Review and Adjust Your Budget Regularly

Never look at a budget as a final product. Because costs and needs vary, a budget should reflect changes in income, expenses and financial goals.

For that reason, a budget should be reviewed regularly to ensure it reflects your needs and wants at the time.

Income can rise, giving you more breathing room for your budget, but so too can expenses. An increase in insurance costs, for example, may require an adjustment from the “wants” categories. Ditto with an increase in rent.

For all these reasons, a budget is fluid.

When first starting out on the budget trail, it’s probably wise to review it monthly. After six months, that adjustment period could be extended to every three months – or quarterly during the year.

8. Cut Unnecessary Expenses

If money is tight, and it’s tough to make ends meet, there are ways to reduce spending and expenses.

It’s time to consider all spending. How much is being spent on expensive coffees or drinks? How often do you eat out? Is the cable package necessary, or can you save by streaming a select few channels? Are you buying groceries at an expensive store, or can you get the same quality at a lower price?

A 2021 survey showed that the average U.S. resident spends $219 per month on subscriptions, according to C &R Research. Many of these are charged via automatic renewal. Checking your subscriptions and canceling the ones you don’t need – there will be some – could cut this charge significantly.

Using a Smart thermostat can save on heating and air conditioning bills. Eating at home saves money; it’s an irrefutable fact. The average American spends $208 per month on restaurant meals. The average price of a cup of coffee brewed at home is 26 cents. Can you get a latte anywhere for close to that cost?

Cutting expenses may seem painful, but it’s nowhere near as painful as dealing with debt. A careful and honest assessment usually finds ways to save, and while cutting some expenses may hurt, cutting many will not.

The key is to be disciplined and to take action.

9. Build an Emergency Fund

Uncertainty is a part of life – think the pandemic in 2020 and 2021. The key is being prepared.

That means ensuring you have an emergency fund that allows you to live for three-to-six months if you lose your job, or if something else unfortunate happens. While a general guideline is three-to-six months, the larger the fund the better.

This fund is very important to ensuring stability, especially if you have a family. Losing a job is traumatic. An emergency fund can carry you through for six months, and you can feel secure about the time you need to find a new job.

Note that the emergency fund does not necessarily equate to salary. Instead, it equates to what you need to maintain your home and pay necessary bills for that time period. It typically will cost less per month when not working than when working.

The best way to build an emergency fund is via automatic transfers as we described earlier. Take that money and set it into an account you can access if the unforeseen becomes reality.

Not having an emergency fund could you to face some very difficult decisions if a calamity arises. For this reason, it’s wise to include savings for an emergency fund in your first budget.

10. Avoid Debt

Debt is more than a financial problem. A link exists between debt and mental health, with those in debt more likely to face issues like stress, depression and anxiety. Poor mental health can lead to poor physical health as well.

Add the financial concerns and it’s not difficult to see that debt can weigh heavy.

The best ways to avoid debt include:

• Create a budget and stick to it.
• Build that emergency fund we discussed.
• Keep your credit score high.
• Be very careful about taking out loans.
• Avoid payday loans.
• Avoid any other high-interest loans.
• Live within your means; do not spend more than you make.

Be extra careful with credit cards. That means in your mind treating a credit card charge as a cash expense. Don’t charge more than you can pay the next month.

If you can’t – and there are times when a hot water heater needs replacing or another unexpected expense arises – pay the amount due as soon as you can. This avoids credit card interest rates that may be more than 20%.

11. Plan for Irregular Expenses

It’s almost inevitable that we all will face the unexpected large expense. It’s important to plan for these events.

Now, it’s not always possible to have $2,000 set aside. But when saving it may be possible to set aside some money for major or miscellaneous repairs or emergencies. Saving $50 or $100 per month can add up and at least help offset the cost – as long as you don’t touch the money for frivolous items.

A budget could include a category for medical expenses, with regular contributions saved for that possible expense. Same for car repairs.

Christmas arrives annually, and no, it’s not really an emergency. But it could be if you look up on Dec. 15 and realize you have nothing set aside for gifts. If you estimate $1,000 spent on presents, starting in January set aside $83.33 per month ($1,000 divided by 12 months). By December, you’ll have that money budgeted and in the account.

The same can be done with a major repair category. A little bit over time will add up. It’s not simple, but it’s just as important to set aside money for emergency expenses in a budget as it is to set aside money for vacations.

If your budget does not allow for these extra savings, another other option is the emergency fund we’ve already discussed. Savings from that fund can be used for unexpected expenses, which are in fact emergencies. Just be sure they’re used to continue replenishing what you spent.

12. Use Cash for Discretionary Spending

The great thing about a debit card is its ease of use. Using a card doesn’t even feel like money is spent. If cards are overused, it can destroy the budget.

For some of us, spending actual cash helps us keep to the budget and avoid impulse purchases. How would that work?

• Create a budget.
• Crunch the numbers to determine what you have to spend out-of-pocket each month.
• Take that money in cash, and spend it only if you have the cash.

This is where the envelope budget system we discussed earlier could come into play. Once you determine what you can afford to spend out of pocket per month, take that money and put it into an envelope. Spend what you have in the envelope, and when the envelope is empty, stop spending.

This method requires handling cash and being disciplined with it. But it discourages overspending, helps break dependence on credit cards and keeps front of mind what you have to spend.

13. Make Use of Discounts and Coupons

None of us should be above using coupons, finding discounts and taking advantage of any way to save money.

Most major grocery stores have a rewards club that offers special discounts to members. Joining is free. There’s no reason not to sign up.

Once enrolled, take advantage of the discounts. If Brand A is $4 and Brand B is on sale for $2.49, buy Brand B. Savings like this add up.

Discount and Coupon Apps:

• Honey is a web app that integrates with your browser and checks for coupons to apply to the item you want to buy, thus lowering the price. It also will tell you if you found the best price.
• Ibotta is an app that gives cash back every time you shop and can be used with a phone or web browser (if you shop online). It offers savings on special items and allows earnings to be withdrawn to your bank account once you hit $20.
• com is an online site that allows you to print coupons, or link your store loyalty card to the Coupons.com app. By doing that, coupons are automatically linked to your card, and at checkout, discounts are applied.

Other apps that could help include Fetch, Do$h and Rakuten, and websites like TheKrazyCouponLady.com, Groupon.com and RetailMeNot.com.

14. Get Everyone on Board

For those with families, involving everyone in the family in budgeting helps all understand the basics of money, and empowers all to be aware of spending habits.

Teaching a child the value of money cannot happen too early. If part of a budget is an “allowance” to a son or daughter, it’s amazing to see how those sons and daughters change their thinking about what they want when they are deciding how to spend their own money.

There is nothing wrong with sharing with the family information about how to save for a trip or event. In fact, it’s a good thing. It promotes shared responsibility and allows the household to work together toward a goal. And it may even lead to contributions from family members.

Including the entire family does more than teach. It involves everyone in the financial process and promotes a shared purpose and vision toward financial well-being and responsibility.

15. Educate Yourself Continuously

We never stop learning about financial matters.

Crypto was not with us at the turn of the century, and the first ETF appeared in 1993. Given the importance of personal finance, it’s vitally important to continue educating yourself about financial matters.

Financial Literacy for Young Adults Simplified breaks financial matters down into understandable terms. That is just one book that can help. Another is Why Didn’t They Teach Me This in School? And there’s always the tried and true Personal Finance for Dummies. Online blogs provide financial advice, and courses and workshops help keep us current.

The podcast craze has several helpful podcasts that can help with financial education. Among them: Stacking Benjamins, Planet Money, Afford Anything and How to Money, which helps beginners understand financial basics.

There’s plenty of information out there, on numerous platforms. The challenge is taking advantage of what’s out there in the best ways that keep you informed about personal finance.

Taking Control of Your Finances

The No. 1 rule for personal finance is to live within your means. That means not spending more than you earn.

While that can be challenging, it’s important. Nobody wants to deal with debt, and living within your means avoids that.

Budgeting is the first step toward financial health and well-being. It provides a photograph of your financial situation and shows where you can save and spend. While individual numbers in a budget can change from month to month, the importance of having and following the goals in a budget does not.

If debt ever becomes an issue, nonprofit credit counseling agencies provide a free session with a credit counselor who will review your finances and suggest educational tools and resources. They may discuss strategies like debt management or debt consolidation if you’re struggling with credit card debt.

Talking to a professional can help you create a budget and come up with a plan for your money that will give you a solid foundation for years to come.

As we continue on our financial paths, it helps to know there is support and help available that will develop our financial literacy. Take advantage of what’s offered.

But understand that the best time to start budgeting is now, today. It is an important and foundational step in our financial lives.