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Budgeting 101: How to Start Budgeting & Improve Your Finances

Budgeting 101: How to Start Budgeting & Improve Your Finances

Feeling disorganized in your life?

Your finances are everywhere. Money coming in from somewhere, going out somewhere. 

Not having enough cash in your pocket when you need it and having more (which you then unnecessarily spend) when you don’t need it?

Not happy with your money management skills?

Do not worry, most people find themselves in this situation at some point in their lives. Well, it’s not good. But it’s a kind of necessarily evil.

Because that’s when people really take some time to think about their finances. 

Usually everything happens in autopilot. We just go about living our life. And it’s when the money mismanagement reaper comes that people actually sit down and start thinking.

Wanna know the solution to all this financial conundrum?

It’s to pick up the money management skill. That’s something not taught in school or university.

We got to learn it through life.

But where do we get started?

Is it as easy as reading some blog posts and downloading few personal finance apps?

You gotta start somewhere right. And that’s where budgeting comes!

It’s the start to the end of all your money mismanagement problems. The first step in developing a strong money management skill.

Creating a budget.

How simple, and yet nearly no one does it right!

In this guide, this is what we are going to learn about. Budgeting 101. The bare basics.

In short, how to be good at budgeting.

Know that budgeting is one of the foundational bases for money management. Anyone wishing to master money management have to learn budgeting.

Let’s start from the basics.

(Budgeting is one of the most boring yet most crucial things everyone must learn. It’s like watching those cartoons teaching alphabets to kids. It’s too boring, but you have to sit with the kids and watch them. There is no way out!)

I will try to keep this guide interesting and informal to not bore you out. Do read it till the end. Who knows, you will be a budgeting wizard by the time you finish reading!😉

With that said, let’s get started!

What is Budgeting? And How Useful is Creating a Budget?

Budgeting is nothing, but the process of formulating a plan to spend money.

Usually, we spend money as we feel like it.

Oohh I’m hungry, let me order a pizza. Oohh nice dress, ordered! Wow, new headphone model, here’s the order please…

And at the end of the month, you basically have no idea what all you bought and where your money went. That’s the usual case.

But from today onwards, right now onwards, you will not be working like this.

Why?

Because you know the importance of budgeting (or will in a short time😉)

So, what do you do different?

You create a plan.

Yes, like a floor plan for buildings. But this time, a plan for spending.

Myth Busting: People usually think that budgeting means saving money. It’s thought of as a method employed for being frugal.

But in reality, budgeting is just a method of planning how you spend money. Budgeting doesn’t mean you have to cut spending, save more, etc. It just means that you pre plan how much you are going to spend. Once you do that, you usually keep a close track on every expense you incur afterwards, and at the end of the month, compare your spending with your initial budget plan and understand what went wrong (and right).

It’s a method for getting organized with your finances. 

What actually happens is that when people closely track their spending for some time, they realize that they were unnecessarily spending a lot of money. 

Nearly everyone who starts to budget will realize this.

Once they understand this, they automatically stop such unnecessary spends.

What I wanted to convey was that, budgeting isn’t about being frugal or saving money. It’s about making a plan and being more organized. But the end result of building a budget and following it is your realization that many of your spends are unnecessary and could be eliminated.

Hope you now understand what budgeting is and it’s importance. It’s a method to plan your spending. And it’s important because it helps you understand where your money goes.

It makes you sit down and ask yourself, “Should I really put aside money for this thing? Is it actually necessary?”, and “I had a planned amount set aside for this activity, why did it cost more than what I planned? What went wrong?”

In short, that’s budgeting.

Yaay!

Still wondering if anyone actually do this? Do people budget?

Isn’t budgeting hectic? Is budgeting worth your time?

Well, nearly all rich people do this. It’s one of the main reason the rich are rich and keep getting rich. They plan. A lot. They know what to spend on and where their money goes.

It’s 100% worth your time. It’s a necessity.

And budgeting doesn’t take as much time as we think. It takes a while the first time you do it. But from the 2nd month onwards, it’s more of an iterative process. You will have to spend only a small time.

And once it becomes a habit, you can proudly say that you have mastered the first step in money management.

Now, let’s see how to make a budget.

How to Start Budgeting (in 8 Actionable Steps)

Let’s now look in detail at how to start budgeting.

1. Define Budgeting Goals: Why Do You Want to Start a Budget?

The first step in budgeting is to define your goals. To define why you want to start a budget. It could be for a number of reasons. Some examples include:

  • To break living paycheck to paycheck
  • Reduce overspending
  • For finding a way to save more
  • Getting out of debts

There could be many other reasons. Whatever the reason, it is best to define the goals first as it will help you make the right choices while preparing the plan.

Moreover, knowing your goals clearly is said to have a positive psychological impact on the budgeter. This well help you prepare the plan better and encourages you to make an emotional investment. This way, you are less likely to stray away from your goals.

2. Analyze Your Spending Habits

The next step is to analyze your present spending habits. You have to find where your money is really going.

It could be on groceries, movies, streaming subscriptions, loans and mortgages, travelling, charities, etc. You have to now track them and list them clearly.

It is best if you could track your expenses for 30 days. Because most of the expenses occur on a daily, weekly, or monthly cycle.

Wondering how to track your spending?

Few ways are:

  • Make a spreadsheet or buy a notebook: You can enter your expenses as and when they come. The problem with this method is that you usually have to add expenses as an when they occur. Otherwise, we usually forget them. Notebooks being bulky, the chances are that you won’t have it with you at all times and might lose out on some entries.
  • Use you credit card and bank statements: This is another method to track your expenses. The problem with this method is that even though you will have a solid idea of the amount you spend, you might forget why made some particular transaction. You might not be able to categorize that odd $50 spend, was it on groceries? a dress? gave a friend?
  • Use a budgeting app: We recommend using any of the budgeting apps. You can register the spend as and when they occur. Some apps are advanced enough to link to all your banks accounts, investment accounts, etc. That way, you will have a close eye on your actual spends. Few such popular apps include Mint, Dollarbird, PocketGuard, Honeydue (for couples), etc.

Segregate your spending into two categories: Fixed expenses and Variable expenses. Fixed expenses are the ones that remain fixed month over month. For example, mortgage, loans, rent, EMIs, subscription charges, etc.

The varibale expenses are the ones that vary every month. It could be electricity, other utilities, eating out, groceries, entertainment, etc.

You have to identify all the expenses and categorize them as fixed or variable. Because once you know your fixed expenses, it becomes much more easy to plan your spending for variable expenses (with the remaining money you have).

Once you have tracked all your expenses, the jobs half done. You will now have a fair idea of where the money is going. Whether it is it on food, education, house, entertainment, or some other expenses.

You might also come across some irregular expenses. For example, your spends on holidays and festivals like Christmas, special occasions like birthdays, gifts, taxes, etc. Budgeting will help you understand your irregular expenses as well.

3. Calculate Your Monthly Income

Now that you are aware of how you are spending money, the next step is to calculate how much you are earning in the first place.

You have to add all the income you generate. That includes:

  • Salary
  • Side hustle income
  • Dividends and investment returns
  • Income from business

You have to add them all.

Points to Ponder: If you only have one income (salary from your job), it’s high time you really start giving any of the side hustles a try. People hardly ever get rich working a 9-5 job.

You must actively start thinking about developing other sources of passive income. Like starting a blog, a podcast, a YouTube channel, etc. Or start a business like a restaurant, retail store, etc.

Because rich people most usually have 3-4 (or more) sources of passive income. And that’s what you should be trying to do too.

If possible, you should start doing two things from today:

  • Start investing (on stock markets, commodities, gold, land, or something that appreciates in value over time and provides a decent annual return)
  • Start a side hustle (Blog, podcast, YouTube channel, Self-publishing, etc.)

Because now you will have 3 sources of income. It will take some time to see returns from your side hustle and investments. But the earlier you start, the better.

I hope you understand the power of compounding. Every single year can have a dramatic effect on boosting your wealth in the long-term! A seriously dramatic effect!

The best way to get ahead is to start at the earliest (you really should). And if you are wondering which side hustle to try or where to get started, we recommend blogging. It’s one of the best side hustles to get started with (Easy, scalable, and profitable).

Eager to get started with blogging?


Start a Blog Now

You will now know your overall income per month. If possible, reduce the tax equivalent for the month as well.

This is what you will essentially have at the start of a month. Now, it’s time to start planning and allocation!

4. Allocating the Budget

Now it’s time to plan your spending for the upcoming month. The process of budget allocation.

The first step is to give priority rankings to all your expense items. Categorize them as necessary, okay-ish, and unnecessary. You should first allocate your budget for the necessary items, then the okay-ish items and then the unnecessary items (its better to eliminate this spending if you can)

As an example, car loan payments, rent payments, educational fees, monthly investment for your side hustle like blog hosting, etc. are necessary expenses. Groceries, fuel, entertainment, etc are okay-ish items. These are items that are necessary, but where you can reduce your spending. The items with scope for improvement.

Paying for 4-5 streaming services every month falls under unnecessary spend. At max, have 2-3 per month. With the number of streaming services going up every month, it’s best to pre-plan which shows you want to see and then pay for that single service alone. And switch between providers every month. Similarly, buying 5 new dress a month is unnecessary. Spending too much on cigarettes’ and alcohol is unnecessary. Your aim should to be to reduce this spending as much as possible (and if possible, cut them out entirely).

As part of allocation, you can directly keep aside the money for fixed expenses (both necessary and okay-ish) as they will remain same month over month. The remaining amount is what you have for the variable expenses and unnecessary spends.

While allocating budget for variable expenses, keep a small buffer as well. You can choose the buffer amount. For example, 5% more than the amount you foresee would be a good buffer. Because if you do not hit the buffer, the amount that remains free at the end of the month can be diverted to your savings and investments.

Also, for variable expenses, do not simply allocate the same amount as the previous months. Adjust the budget according to how you think the next month would go. For example, if you might have plans for a day trip next month, allocate more for fuel expenses than usual.

Interesting Thought: Apart from helping you organize your finances, budgeting has positive psychological implications as well. You are essentially looking one month into the future and planning for then. People who plan for the future tend to perform better than those who don’t.

At the end of allocation, whatever you have left will go towards two things: unplanned expenses and savings.

5. Continuous Monitoring

Once you have drafted the budget plan, you can start acting on it. Try to make the spends according to what you have planned.

You also have to keep monitoring how you are performing with respect to your budget. If you feel like you are straying away, cut back on the expenses.

Continuous progress monitoring will help you not fall back to your old financial habits and keeps you on check.

Also, you will spend money for activities that you haven’t planned before. This will happen on a daily basis. You have to track them closely and add them to the expense tracking for this month.

Because like we said earlier, you will have to allocate a part of your income for unplanned expenses. By tracking them closely for a few months, you will be able to identify how much you are spending that way.

In other words, keep recording your spends like a mad person. It will really help you understand your financial mindset. And will prove to be a lifesaver down the lane.

Needs vs Wants: Budgeting will bring you head to head with this age old concept of needs vs wants. Needs are what is necessary for survival whereas wants are wishes.

Your aim should be make sure that you move aside money for your needs first. And before you spend any money on wants (or your desires), move aside a part of your income for savings and investments. 

That is, wants should be the last thing you address while drafting a budget plan.

Basically, you have to become a tracking ninja. Track and record every expense you are making continuously.

6. Review and Revise

The final step is review and revise.

At the end of the month, compare your actual spending with the prepared budget. If you were able to stay within the planned limits and put aside a good percentage of your income for investments, you are doing right.

Else, figure out what went wrong. Which are the areas that you have to improve.

Most people have a weak point. Some people tend to overspend on food, some people on entertainment, etc. Find out which areas of concern and address them.

The ultimate aim should be to meet all your needs, address all the relevant wants, and still have a good amount of money going to savings.

Well, that’s how you prepare a budget.

Please note that we have only seen the basics of how to budget. Budgeting can be done in numerous ways.

Each of these methods adds some rules to what we have learned and cater to a particular goal. 

For example, some budgeting methods give importance to saving more and will make you set aside a defined income at the beginning itself. They will give priority to saving over spending.

Then there are methods that make you set aside money for the needs first. Some that are designed to accommodate certain wants first.

Depending on what your defined goals are, you have to choose a method of budgeting. Let us now see some of the popular budgeting methods.

What are the Most Popular Budgeting Methods & Techniques?

There are many methods of budgeting that people use. Depending on your goals, you can adopt any of them. For now, we will see 3 highly popular budgeting methods used.

1. 50/30/20 Budget Rule

The 50/30/20 rule of thumb for budgeting is one of the most popular budgeting methods employed. 

According to the 50/30/20 budget rule, you allocate 50% of your income for the most important and necessary expenses (the needs), 30% on not so important expenses (the wants), and the remaining 20% of your income for savings and investments.

2. Zero-Based Budgeting

According to the zero-based budgeting, you give every dollar a job and your budget will be zero at the end of every month.

Budget being zero doesn’t mean that you actually have to spend everything you make. It takes into account the savings as well. Basically, it means that there will be no money left without a purpose, you will have accounted every single dollar you spend or save.

3. Traditional Budgeting

This is the traditional method of budgeting where you record all your income and expenses (both fixed and variable) and then set goals on how to spend them.

When we talk of budgeting, this is what we usually refer to. To identify all the income and expenses, and then plan accordingly.

What are the Best Budgeting Apps and Softwares?

Now that you have a good understanding of budgeting and how to budget, let us take a look at some of the most popular budgeting apps.

Budgeting apps are highly useful because they are handy (you have them as long as you have a phone or system with you), they have an organized interface, you can link them to your bank accounts and track your spends from transaction history, they can show you the upcoming fixed expenses, etc.

Also, it’s much more easy to use an app than keeping a notebook or managing a spreadsheet. It’s both visually and functionally better.

Let’s see some of the most popular budgeting apps and software that you can use:

  1. Mint
  2. Personal Capital
  3. PocketGuard
  4. YNAB (You Need A Budget)
  5. Honeydue
  6. GoodBudget
  7. Savology
  8. Tiller Money
  9. Qapital
  10. Mvelopes

Final Thoughts

Budgeting might seem a bit overwhelming and boring at first. Having to constantly track your finances, recording and analyzing them. But it’s actually not as hard as you think.

Try it out and you will know. Rather it’s more fun. You will get to know yourself better. And above all, you will start managing your money better.

You will start to think twice before making a financial decision.

And like we said, budgeting is more of an iterative process. You have to do some work for the first month (it really will seem tough). But do not get demotivated and stop half way.

Because from second month onwards, it’s just a rinse and repeat of what you did the earlier. You will have accounted for all fixed expenses and will have a good idea of how much to allocate to each activities. It will become twice as easier.

And over a period of few months, this will become a habit. You will work on autopilot.

I hope you had some takeaways from this guide.

If you are new to budgeting, do give it a try. It’s a very healthy financial habit (kind of mandatory actually)

Please do let me know your thoughts on the topic in the comments section below. Feel free to share your stories.