A complete beginner's guide to creating a budget
The cost of living keeps spinning out of control and the economy feels increasingly unpredictable. If you're worried about making your money stretch from paycheck to paycheck, creating a budget can help.
Looking to discover the secrets to money management? Let's go.
Budgeting 101: How to manage a budget
Between food delivery apps, online stores to fulfill every desire in a few clicks, and contactless payments, spending has never been easier. But even spending has its kryptonite...and that kryptonite is a budget. Put simply, a budget is a written agreement you make with yourself to spend specific amounts on your various outgoings.
Feeling in control of your finances is pretty awesome and puts you fully in the driving seat of your future. To follow a budget, you need to plan carefully and cultivate willpower of steel.
Below are some basic budgeting steps so you can learn how to manage money like a boss.
1. Work out total earnings
Even people who make bank keep track of their income and spending. Whether you're a baller or an underpaid essential worker, you should always know how much cash you have rolling in every week, month, and year.
Add together the income you get from work, benefits, and side hustles—and don't forget to track pension payments and loan repayments. Even money that doesn't make it into your account counts towards total income.
If you're self-employed, be sure to calculate how much tax you owe each month, and set that aside. Waiting until it's due could lead to a smorgasbord of unwanted consequences when the time comes to settle your tax bill.
2. Look at how much you spend
Before diving into the budget bit, look at your spending over recent months. Be super honest with yourself and take note of overspending. Stuff like takeout and digital subscriptions are common areas for lots of people.
Remember, you don't have to cancel everything and live like a monk, but making small cutbacks adds up over time. You can factor treats or luxuries into your budget to ensure you don't feel too much FOMO when Nike drops new kicks.
Now you've looked at how much you're spending on utilities, consider doing some good old-fashioned bargaining. Shop around for cheaper internet, energy, and cell phone packages. Call your current providers and tell them about the savings you've found.
Chances are, they'll offer you an even better deal—if not, make like a celebrity couple, and split.
3. Select a budgeting plan
People who have Bruce Lee-style discipline usually aren't superhuman. Instead, they use techniques to maintain self-control. Put simply, having a plan makes it easier to stick to a plan.
Over the years, people who love to spend have discovered tricks to take better care of their cash. You'll learn more about those later on.
4. Track progress
The point of having a budget is to keep checking yo'self when it comes to spending. Going through the effort to make a budget and not staying focused won't help you save for a vacation or pay off debts.
Put aside time each day to check you've followed your budget. If you haven't, it doesn't mean the whole effort is a failure. Just make a note of your overspending and try not to do it again. It'll get easier the more you do it.
5. Automate utility payments
Having regular payments come out of your account makes it easier to pay your bills on time and avoid late payment fines. Go one step further and set up a regular payment to go into your savings account when money comes in. There are few better habits to get into than taking care of future you.
6. Open an online savings account
When you put money aside for the future, you're making a crucial investment. Over time, small savings add up and can help you build the future you dream of. Want to buy property, get a car, and go on vacations? Savings are the secret to doing all that without getting into an almighty mountain of debt.
Attaining financial freedom gets more difficult as the cost of living and buying a home increases, so saving is more important than ever.
These days, trying to find a savings account that offers a high Annual Percentage Yield (APY) is harder than landing a decent date on Tinder. But have heart, because they are out there. The national average APY is currently at 0.37%¹, but a Varo Savings Account offers rates of between 3% and 5%².
7. Regularly review your budget
While sticking to your budget is necessary for financial success, a little flexibility is required. Your income, expenses, and priorities might change, and you should ensure your budget moves in sync with your lifestyle.
Resist the temptation to toss your budget to the wayside if your earnings increase or you feel like you're in control and don't need it anymore. Amend it as new developments occur, and remember that budgeting is the best way to manage your money long-term.
Essential budgeting categories
No matter what type of budget you go for, you'll need to take stock of all your main areas of spending. This shows how much bag you have left after you cover the necessities.
While the amount that's left is called disposable income, treating it as something you throw in the trash is a rookie mistake. The more carefully you manage your spare cash, the better chance you have of being a high roller down the line.
Here's an outline of the main budgeting categories.
We all need to live somewhere, so housing costs are your top priority. Take into account home maintenance, HOA dues, property taxes, and mortgage or rent payments.
Although the rise in WFH means people are typically spending less on transportation, everyone's gotta get somewhere.
Food and drink:
Food is essential, but it's also an area where lots of people overspend. If you're into luxury treats and fancy wine, consider leaving those out of your essentials list.
HVAC, electricity, water, and internet are all essentials, and should be noted down in your budget.
Healthcare and wellness:
Taking care of your health in the short-term means less expense over the long run, so put money aside each month for physicals and dental care.
Note the various insurance providers you pay each month.
Debts, savings, and investments:
Saving money is critical for long-term financial good health. Generally speaking, investing is high-level money management, but everyone should have a retirement account.
There are tons of ways to manage your money and avoid a lifetime of living in Broke Town. Let's look at some popular budget examples, including the envelope method, reverse budgeting, and the 50/30/20 budget.
The 50/30/20 budget
This popular system is easy as pie and a great entry point for beginner budgeters. It involves setting aside 50% of your income for the basics, 30% for luxuries and personal care, and 20% for savings.
Although this method is simple, you need to pay close attention to how much you spend each day. Most of the heavy lifting takes place in the beginning as you're learning expense tracking, but it does get easier.
Zero-based budget (ZBB)
Zero-based budget (ZBB) means accounting for how you'll spend every penny that comes in, right down to the cent. The aim is for income minus expenditure to amount to zero every month.
If you're that guy who can't help spending too much on entertainment or food, the ZBB is a great choice. You simply create a new ZBB each year to ensure your budget is up-to-date, and get savage about cutting expenses that aren't absolutely necessary.
The reverse budget
Reverse budgeting is all about flipping the script and focusing more on saving than spending. To do it, pop a chunk of your income into your savings account before allocating any other spends. Most people aim to save between 10% and 20% of their paycheck, and then take care of their other expenses.
The 60/40 solution
The 60/40 solution is great for budgeters who want to maintain a tight grip on their spending. You split your income into two broad categories—basic necessities and personal care make up 60%, and the remaining 40% is allocated to savings.
The 40% is split into four subcategories: 10% each goes into a retirement fund, a long-term savings account, short-term savings account, and a fun fund.
The envelope method
The envelope method is a little old school, but you can bring it into the modern age with a budgeting app. Whether you do it digitally or on paper, you split your cash into 'envelopes' and label them, and you can only spend the money on the category it's assigned to.
It's very easy to follow, and simple to stick to, and decreases the likelihood of overspending by a long shot. You don't need to do any math or record anything on a spreadsheet, making it one of the most popular budgeting examples.
Budgeting top tips
Now you've got the full scoop on the ways you can budget, so here are some money management tips to keep you on track:
Always overestimate your expenses and how much you need to save so you have a buffer in case of an emergency.
Be savage when considering which expenses are necessary and which ones you can let go of—do you really need Spotify and YouTube premium?
Every time you pay off a debt, put the amount you were paying each month into a savings account.
Having separate accounts for necessities and luxuries can prevent you from falling short when it comes to paying your bills.
Whether it's in a notebook like a dinosaur or in an app like a normal person, keep track of your budget somewhere.
See money management as a lifestyle and part of your weekly and monthly routine, rather than a one-off or short-term fix.
How to cut spending
While tracking your income and expenses is the best way to make your paycheck go the distance, cutting spending is also usually necessary. Here are some tips for slashing those pesky (but often tasty and/or fly) luxury expenses:
Keep a written record of everything you spend.
Regularly check how much you shell out on memberships, streaming services, and recipe boxes—cut back during hard times, and re-subscribe when money isn't tight anymore.
Use LED light bulbs.
Get a smart thermostat and program HVAC systems to operate only when you need them.
Lower your water heater's temperature.
Consolidate your debts.
Shop around for cheaper insurance.
Cook your meals from scratch more than you dine out or get takeout.
Leave your credit card at home, and only take out the amount of cash you need when you go out.
Money management: key takeaways
The first step to sticking to a budget is committing to making one. It won't be easy at first, and there's a chance you'll struggle to stick to it. But, like anything worthwhile, practice makes perfect.
Remember when you first started learning an instrument or new game, and it felt like you'd never catch on? Budgeting isn't so different. It'll take a while to get into the swing of being the David Goggins of spending discipline, but anyone can do it.
Let's look at some key takeaways from this article:
Budgeting involves calculating your income and spending and planning how you spend in advance.
Your basic necessities are the top priorities, but it's still super important to factor in fun and entertainment.
The 50/30/20 budget, ZBB, reverse budget, and 60/40 solution are examples of budgeting techniques.
Budgeting shows you how much you can afford to spend and highlights areas of overspending.
Planning for the future involves making sacrifices in the short term that lead to long-term gains.
So, what are you waiting for? Get budgeting and take control of your future.
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