Budgeting 101: Everything You Need to Know

I’ve talk about why you need a budget on my blog before, but for some reason is seems like the majority of people still don’t have one. In fact, according to a poll by Gallup, two-thirds of households don’t have a budget. Budgets are REALLY important! Whether you’re rich, poor, middle-class, etc., a budget can make a big difference in your financial situation. Budgeting is so important but not enough people have one.

One of the reasons I think a large majority of people still don’t have a budget it because of the negative connotation associated with budgeting. There’s a societal perception that if you have a budget or are sticking to one that you are bad with money. In reality, if you have a budget and you stick to it, you are way ahead of the average American. We need to change the way we are thinking. A budget should be viewed as a tool to help you reach your financial goals, not something that you have to do because you are broke. Therefore, I want to ask you some questions that will help determine if you really need a budget:

1. Do you have debt?

If you have any kind of debt then you should definitely create a budget. Having debt is stressful and if you have many different kinds of debt (credit card debt, student loans, car payment, etc.) a budget can help keep you organized to make sure that you never miss a payment. A budget can also help you to pay down your debt quicker by understanding where your money is coming from and how much discretionary income you might have to pay towards your debt.

2. Do you have financial goals?

Who doesn’t have financial goals?!? We all have financial goals such as:  

  • Retirement. Do you want to retire early? A budget can help you manage your money better so that you can reach retirement sooner.
  • A vacation. When was the last time you took a vacation? Budgeting can help you understand your financial situation better so you spend your money more wisely and can save up for that dream vacation.
  • Debt payoff. Is that credit card debt piling up? Student loans getting you down? Understanding your financial situation better by having a budget can help you come up with a plan of action on how to pay down this debt as quickly as possible. 
  • Buying a home. Looking to make a large purchase like busying a home? A budget can help you figure out how to best save for a large purchase that you may never have thought was possible.
  • Funding an emergency fund. Want to have some money in savings for a rainy day? As you can see from all the above financial goals, budgeting will help you be able to figure out how to fund your emergency fund, which can help in the event you get a big unexpected expense.

Clearly, having a budget helps you stay on track with your financial goals. Without a budget it’s very easy to just spend money on whatever without thinking about it and how it would impact your financial goals. 

3. Do you know what you’re spending your money on?

Without a budget or a way to track your spending, you could be wasting your money!  By having a budget, you can easily see exactly where your money is going. These days it’s so easy to spend more money than you make each month. This is partly because of how easy it is to get into credit card debt and loans nowadays. If you think you might be spending more money than you make each month and relying on credit cards too much to pick up the difference, you MUST create a budget today!

The truth is, you won’t know where your problem is until you have a budget. This allows you to quickly see what needs to be changed. Having a budget shows you the income that you are bringing in and compare that to your expenses each month. From there you can pinpoint what needs improvement so that you can stop living paycheck to paycheck.

How to Create a Realistic Budget

The first thing you need to do to make sure you have an accurate and realistic budget, is track  and include ALL of your income and ALL of your spending.

You want it to show where your money is coming from and where it is going. In order to do this it’s important to gather all of your receipts, bank and credit card transactions, etc. The goal is to collect all the information you need to make sure that you are not missing any expenses. This will help you evaluate your spending. Once you do this, you may be pretty shocked by your results. This shock is actually a GOOD THING. This shock will serve as a wake up call that will encourage you to be wiser with your spending. Let’s talk about the elements in a budget a little more:

Income Information

For the income section of your budget, you want to make sure you include any and all income streams that you have. This could include income from your day job, side jobs, rental property you might have, or other passive income sources. You also want to be mindful of how often you are paid, whether that’s twice a month, every two weeks, once a week, etc. One common mistake people tend to make is not realizing how their income can drastically fluctuate from month to month, even if you work the same hours every month.

The easiest thing to do if you have a fluctuating income is provide your best estimate, and make adjustments to your budget as your income changes. Also, don’t include discretionary income such as bonuses in your budget. Even if you have ALWAYS received a bonus in the past, there have been situations in the past where people who have counted on bonuses only to be let down when the company wasn’t able to provide this one year. It’s better to leave it off your budget and be surprised if you do end up getting. If you weren’t counting on that money you can put that lump sum towards one of your financial goals. 

Expense Information

Have you ever truly looked at your total expenses every month? I mean REALLY look at every single dollar you spend that month and what you spent it on? Most people havn’t and only ‘estimate’ their expenses. When we just estimate what our expense are, you may end up being way off – like I was when I first started budgeting. Here are some examples of expenses that you should include in your budget:

  • Home – House payment, rent, maintenance, utilities, insurance, property taxes, etc.
  • Car – This includes all car expenses such as your monthly car payment, gas, maintenance, insurance, license plate fees, and so on.
  • Television, cable, Netflix, Hulu, etc.
  • Cell phone service and/or cell phone payment.
  • Internet service.
  • Food – This includes all groceries, eating out, snacks, etc. This is one of the most under-estimated items. Make sure that you seriously take a look at your food expenses for the month and add it up. 
  • Clothing.
  • Entertainment – This could be things like going to the movies, going out for drinks, concert tickets, sports, and so on.
  • Charity – If you regularly donate to charity, then this should be an area you budget for.
  • Taxes – If you are self-employed and don’t have taxes automatically coming out of your check each month, you definitely want to estimate that and include it in your budget. No one likes having a giant tax bill at the end of the year that they weren’t budgeting for all year long. 
  • Health insurance.
  • Miscellaneous – Pet expenses, fees, childcare, school, gifts, etc.

Expenses are going to be different for everyone. For example, I have pets so my budget initially included things such as grooming, pet food, training, and flea/tick medicine. In creating the budget I was able to discover that grooming was a large expense that I really didn’t need because I could easily do it myself for much cheaper. Having better visibility to things like this can really make a big impact on your financial situation.

Another key aspect of having a realistic budget, is keeping your loved ones involved throughout the process. Even if you’re the primary person the manages your family’s finances, having them involved is crucial to successfully following your budget and meeting your financial goals.

A budget doesn’t work if the other person doesn’t know it exists!

Make changes when/if needed.

It’s really important for you to review your budget on a regular basis. For me, that’s once a week – but do what feels natural for you. Schedule a time that works best for your life and your situation, just make sure it’s something that you can consistently stick to. It’s important to keep up with the changes in your life and adjust your budget accordingly.  Your income could change, your expenses could change, and your financial goals could change over time. If you get a raise at work or your phone bill goes up, be sure to update your budget.

Motivation

Living a frugal life is a choice and I know first hand that it’s not always easy. With large amounts of debt to pay off, and a stagnant income it can be hard to sick to a budget. That’s why knowing your financial goals and what motivates you is so important. Understanding yourself and your motivators will help you continue to work hard towards your goal, even when it seems impossible. Without having that motivation, it can be easy to just want to give up. Whatever your financial goals may be, there are many ways to stay motivated so that you can reach it. Here are some great ideas on how to stick to a budget and find your financial motivation:

Surround yourself with people who share the same financial goals as you.

Learning how to stick to a budget can be a hard task but spending time with others who have that common goals can help! You can use each other as a support system and motivate each other. 

Keep up with the latest financial education.

There are so many different ways to get information in todays technological world. You can get information from books, the internet, podcasts and even blogs (hence why you’re here!). I would encourage you to always expand your knowledge and read or listen to something related to personal finance every day. You can watch the news, listen to financial podcasts, read personal finance blogs, read financial books, and so much more. The options are endless.

Set smaller goals leading up to your big goals.

If you have a large goal of paying off all your debt, it can be discouraging when I takes a long time. You can start to feel like you’re not making much progress. Setting smaller goals in between can help you stay motivated and focused. For example: If your overall goal is to pay off all of your credit card debt, then you might want to aim for a smaller goal of paying off one credit at a time. Paying off a $5,000 credit card seems a lot more attainable than paying off $30,000 worth of debt. It can help you stay motivated while still challenging yourself to take things one step at a time.

Keep track of your progress.

Be sure to keep track of how you’re doing and review your progress on an ongoing basis. Keeping track of your progress is important in keeping you motivated because it tells you what you need to do in order to reach your goal, and if you are on track or behind. If you discover that you’re behind, it helps you think of some things you need to change to get back on track.

Be sure to still have fun.

Having financial goals and living a frugal life doesn’t mean you can’t spend money or have any fun. Having a budget helps you understand where your money is going and helps guide you to make better choices with the available discretionary income that you do have. Remember to still have fun and enjoy life!

Hopefully you have a better understanding of the importance of a budget and how to get started. If you have any questions, don’t hesitate to reach out to me. I love helping other on their impossibly frugal journey and having an accurate budget is an important part of that. 

Mrs. Frugal

Just your average millennial trying to navigate life and get rid of debt by being frugal.

This Post Has One Comment

  1. Kimmy

    Good info!

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