Budgeting 101

What is budgeting?

Budgeting is tracking your income and spending with the goal of directing your money to the places you want it to go. Being aware of your spending relative to what you earn enables you to take control of your money, prioritize your spending and work toward your financial goals.

Budgeting for beginners: 6 tips to get started

Effective budgeting is the foundation of a healthy financial lifestyle. It’s also a big part of accomplishing your goals in life, whether you aim to buy a car, take a family vacation, update the kitchen, or pay off debt. The hardest part of budgeting is often getting started. To make it easier, follow our six budgeting tips:

1. Set Clear Financial Goals

The first step is to set clear financial goals. Determine what you want to achieve, whether it’s paying off debt, saving for a down payment on a house or building an emergency fund. Your goals will guide your budgeting process and give you motivation to stay on track. Make sure your goals are specific, measurable, attainable, relevant, and time-bound (SMART) to give you a clear roadmap for success.

2. Track Income and Expenses

Start by tracking your income and expenses for a few months to get a clear picture of where your money is going. You can download your account statements into a spreadsheet to analyze your spending patterns or pen and paperwork too. List your expenses into different categories such as housing, transportation, groceries, entertainment, and debt payments. This will give you insights into your spending on a weekly and monthly basis.

3. Distinguish Fixed and Variable Expenses

Differentiating between needs and wants is vital when creating a budget. First, look at fixed expenses that are the same every month and are essential, such as your rent or mortgage and utility bills. Then, identify the expenses that fluctuate week to week or month to month, such as food, childcare, gas, dining out or entertainment. Also consider which expenses are necessary (rent, for example) and which are optional (entertainment). That awareness allows you to make conscious decisions about your spending to avoid unnecessary expenses that might derail your budget and prevent you from meeting long-term goals such as saving for a down payment on a house or paying off debt. For additional tips on handling credit card debt, visit our article on ways to pay off credit card debt quickly. For guidance on saving for a home purchase, check out this article with seven tips.

4. Create a Budget System that Works for You

Once you have analyzed your expenses and have a list of what you can spend on variable and discretionary items based on your monthly income, it’s time to create a budget with line items for each category. Find a system that works for you, whether it’s a spreadsheet, paper and pen, or a budget-planning app. Then, based on your income, expenses, and financial goals, create a realistic budget. Ensure your basic needs are covered first, followed by your savings and debt payments and then optional items. Consider using the 50/30/20 rule as a guideline. This means that 50% of your income goes towards essential expenses, 30% towards discretionary expenses and 20% towards savings and debt repayment.

5. Monitor and Adjust Your Budget Regularly

A budget should be a living, working document that is updated regularly. Review your budget and track your actual expenses throughout the week or month to make sure you’re staying on track. If this is challenging at first, try setting calendar appointments or notifications to help you make it a habit. If you find yourself consistently overspending in certain categories, reassess your priorities and make some lifestyle or budget adjustments. Be flexible and open to tweaking your budget as life circumstances change or unexpected expenses arise.

6. Try Different Tools to Support Your Budgeting Success

You can try different approaches to budgeting to see which tools or systems work best for you. For example, some people like using a cash-based envelope method to track and limit discretionary spending. You label the envelopes “groceries,” for example, or “entertainment,” and place only what your budget allows for that line item inside. When you’re out of entertainment money in that envelope, for instance, you don’t go see a movie until the next month. Other people prefer a no-cash method so they can track each expense digitally. Experiment and see what works for you. Technology offers many tools and apps to help you track your expenses, set financial goals, and automate payments such as deposits to savings. Explore budget planning apps or personal finance apps from your bank or credit union, such as Bellco’s monthly budget calculator. Find the budget management tools that align with your needs and leave behind the ones that don’t work for you.

Creating and managing a budget is critical to taking control of your finances and making meaningful progress toward your goals. Personal budgeting, like any new habit, requires continuous effort and attention. Yet the rewards of financial stability, peace of mind and accomplishment are well worth the work.

To learn more about personal finance, visit our financial education page.