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So you know you should create a budget, but just the word alone fills you with dread.
“Budget” it’s a close second to “diet” on the list of most hated words EVER…(I don’t know that for a fact, but come on, it’s probably true.)
However, budgeting and learning how to manage your money are essential skills that we all must master. After all, creating a budget is key to achieving financial freedom.
Budgeting helps you: determine where your money goes, cut back on needless expenses, and pay off debt faster.
But most importantly, budgeting completely transforms your entire approach to money. You’ll naturally begin to live more frugally, be more mindful of your spending, and switch your thinking from the short-term to long-term.
If you’re a beginner and have never budgeted before, no problem.
Today, I’m going to show you how to create your fail-proof budget and master your money once and for all!
Before we start, make sure you sign up and receive my FREE 75 frugal living tips cheatsheet so you can make staying on budget EASY!
11 Easy Steps to Create a Budget for Beginners
1. Discover Your “Why”
It’s difficult to create a budget (let alone stick to one) if you don’t have a good reason to.
So what’s your “why”?
Maybe you want to:
- pay off your student loan debt so you can travel more
- start building a rainy-day fund so you feel financially secure
- save money to buy your own home
- begin investing in order to save for your retirement
You can have one or more than one reason why you want to create a budget. The idea is that if you keep your “eye on the prize”, then you’re more likely to succeed.
My “why” is to save enough money to quit my draining job and switch to a career that makes me happy. I also budget because I want to achieve financial independence (my goal is $1 million saved) and spend more of my time on the hobbies I love.
Whatever your “why” is, it’s important that you write this down, put it on your vision board, or put it on a sticky note on your mirror. You’ll want to remind yourself of these long-term goals when you’re struggling with the temptation to spend.
2. Find out How Much Money You Already Have
Now that you’re aware of why you’re budgeting, it’s time to find out how close you are to reaching those goals.
Login to your checking, savings, and investment accounts to see all your balances. This will tell you how much money you’ve already saved.
If you don’t have that much saved, that’s okay!
Knowing how much (or little) money you have is another motivating factor. Stay positive—keep your eyes on the prize! You’re already on the right track to boost your savings.
And Personal Capital makes this part EASY.
With Personal Capital, you can link ALL your financial accounts in one place! So instead of logging in to 20 different websites, link your accounts to a FREE Personal Capital account and view your savings, checking, and investment accounts on one screen!
3. Determine Your Total Monthly Income
Here’s where we get down to business. In order to create a budget, you have to figure out how much money you make.
Determine the total amount of money that you take home every month, also known as your net income.
To understand the difference between your gross and net pay and how to calculate each, check out my post:
Related Read: Gross Pay vs Net Pay – How to BUDGET the Right Way
Your net monthly income should include everything from your full and part-time jobs and side-hustles. Make sure to calculate your income AFTER taxes.
If your income varies each paycheck, you need to figure out your average monthly income. For example, you get paid 2x a month and they vary between $1000 – $2000 after taxes. Your average paycheck would be $1500, for an average monthly income of $3000.
I like to work with a nice, round number for my monthly income even though it actually isn’t.
We can’t all be mathematicians!
Round numbers make it easier to remember what you can spend/save in a month. So if you’re monthly income is $3453.27…do yourself a favor and think of it as $3450. You could even make it $3400 and turn the extra $53.27 into a nice monthly savings deposit!
4. Boost Your Income with Side-Hustles
It’s time to LEVEL UP your side-hustle game.
Side-hustles are the best way to grow your monthly income, boost your savings, and increase your spending allowance (IF you NEED to. More on that later…).
The most exciting thing about side-hustles today is that there are so many you can start from the comfort of your home! You can earn an extra $100-$2000/month!
Here are some side-hustle ideas to start boosting your income TODAY!
Take online surveys and earn some extra cash:
- Swagbucks – All you do is take online surveys, watch videos or movie trailers, and earn points. Then, redeem those points for gift cards and Paypal money! Get a $10 bonus for signing up.
- Survey Junkie – Survey Junkie works with big-name companies to do market research. It’s simple: you answer some questions, and get cash. So start monetizing your downtime with Survey Junkie today!
- Inbox Dollars – They offer a variety of ways to earn Paypal cash and gift cards. Take surveys, watch videos, play games, even read emails and earn! Get a $5 bonus when you sign up.
REALLY boost your side-hustle money by learning new skills:
- Learn how to make money with niche websites in my step-by-step guide for beginners.
- Take the Facebook Ads Side-Hustle Course and learn everything you need to know about launching your own freelance business.
- Learn how to turn proofreading into a money-making side hustle or 6 figure business with Proofread Anywhere.
Related Read: How to Create a Money-Making Blog
5. Add Up Your Fixed Monthly Expenses
I recommend focusing on fixed monthly expenses first. These are the non-negotiable items that MUST be paid for and are typically the same amount every month.
Your fixed monthly expenses should include:
- Housing = rent/mortgage, property taxes, HOA fees, etc.
- Utilities = electric, gas, water, phone, internet, cable
- Transportation = car payment, car insurance
- Medical = health insurance, dental insurance, etc.
- Debt = student loan and credit card minimums
Your total fixed monthly expenses are your priority. You should create a budget that covers these first, before anything else. That being said, there are products that help you save money on fixed expenses like utilities, for example. Take advantage of these!
You’ll also notice that student loan and credit card minimums should be viewed as a non-negotiable, fixed monthly expenditure. This is because getting out of debt should be a priority.
At the very least, you need to pay your student loan and credit card minimums every month in order to avoid those pesky fees which are taking your money away!
I can hear what you’re saying: But what about food??
Because the amount you spend on food month-to-month widely varies, it’s hard to calculate if you haven’t already been tracking your spending. We’re keeping things simple, so don’t worry about food just yet.
6. Determine Your Monthly Spending Allowance
Now that we’ve determined the amount you HAVE to spend on your fixed monthly expenses, it’s time to calculate your monthly spending allowance.
A monthly spending allowance is the amount you can spend on everything else that isn’t a fixed expense.
To determine this, follow this simple formula:
total monthly income after taxes
– total fixed monthly expenses
= monthly spending allowance
For example, if you have a total monthly income of $3000 and your fixed expenses are $1800, then your monthly spending allowance is $1200.
Your monthly spending allowance is what needs to cover:
- online memberships/services
- gym fees
- extra payments towards debt
- savings/retirement accounts
- pet insurance
- and all other purchases!
When you create a budget this way, you have the freedom to choose what you spend your monthly spending allowance on!
However, there are still good and bad ways to use your monthly spending allowance.
Unfortunately, you can’t put ALL of your monthly spending allowance towards hobbies…sorry introverts!
This budgeting style is just a lot more flexible than accounting for EVERY SINGLE DOLLAR in 50 different expense categories. That hurts my brain just thinking about it!
7. Track Your Spending (for at least 2 months)
Next, you need to figure out where your monthly spending allowance goes.
I swear, money grows legs sometimes…
This takes a bit longer because you need to track your spending for at least 2 months.
Why do I recommend 2 months? Because you want to figure out averages.
Some months we need to spend more money; others we spend less. You want to get an idea of your average spending on food, gas, clothing, and other purchases.
Personal Capital also allows you to view your expense by categorizes, such as groceries, restaurants, and travel. This helps you easily determine where your monthly spending allowance goes!
8. Cut Back on Spending
There’s no way around it—you need to cut back on spending in order to meet your financial goals.
And your “why” is the entire reason why you want to create a budget!
But cutting back should never mean that you completely deprive yourself of all the things you enjoy. This is just a recipe for disaster. You’ll start to see budgeting as a punishment, rather than keeping your eyes on the prize.
And luckily for you, I’ve put together a FREE cheatsheet of 75 EASY frugal living tips so that sticking to your budget is not a problem. Download it to your phone and/or computer and keep your spending on track!
- Rakuten — Offers cash back and discounts at some of your favorite online retailers. When you’re browsing, it’ll alert you of savings opportunities and promos! Get a $10 BONUS for signing up!
- Ibotta — Whether you’re shopping online or in-store, Ibotta has you covered. You can link store loyalty cards and get cash back in 24 hours or scan receipts. Get a $20 WELCOME BONUS!
Related Read: 21 Extreme Frugal Tips to Save $1000s
9. Use your leftover monthly spending allowance strategically.
Now that you’ve cut back on monthly expenses and started living frugally, you have MORE of your monthly spending allowance leftover!
This is where we need to strategize.
In order of priority, here’s where your leftover monthly spending allowance should go:
- Build a rainy-fund — You first need to save $1000-$3000 to cover unexpected expenses, such as car and home repairs.
- Build an emergency fund — Next, set aside enough money to cover 3-6 months of expenses and maintain this amount in a high-yield savings account.
- Pay off high-interest debt — Once you have a rainy-day fund, paying off high-interest debt is your next priority. This is any debt with interest rates of 6% or more. Why 6%? Because the average retirement portfolio sees an annual return of 6% or more. If the interest on your debt is lower than this, then your money should be invested so that you can see that return. But if you’re losing money to interest rates of 6+% on credit cards or student loan debt, then you won’t see ANY return on investments—they’re negated.
- Save money for retirement AND pay off low-interest debt — Now that you have a rainy-day fund and eliminated your high-interest debt, start putting extra money towards retirement accounts (IRA, 401k, stocks, etc.) and low-interest debt (<6% interest rates).
I know—It’s difficult to think about saving money when you’re still in debt.
However, building a rainy-day fund and emergency fund are more important. To understand why, make sure to read my post on rainy-day and emergency funds.
10. Face Your Debt Head-On
You’ve saved up your rainy-day fund, you’ve built your emergency fund, and now’s the time to face your debt head-on!
The goal is to get out of debt once and for all! To do this, you have to put some of your leftover monthly spending allowance towards your debt. How much depends on how aggressive you can afford to be after cutting back on expenses.
Let’s say you’ve cut back on Starbucks and now have an extra $25 every month…great! Put that little extra towards your debt.
By paying more than the minimums, you’re eating away at the principal balances, saving yourself money in interest, and moving closer towards financial freedom. That is the ultimate goal when we create a budget!
Related Read: 13 Mistakes You’re Making That Are Keeping You in DEBT
11. Stay Motivated
This is perhaps the most important factor—keep yourself motivated!
When you first create a budget, cutting back on expenses and sticking to it are challenging. We’re all tempted by that latest online sale or discount clothing rack.
However, you can succeed and master your money by staying motivated and finding sources of inspiration. For example, listen to personal finance podcasts, or read some of the fantastic personal finance books on Amazon.
You can also, sign-up for the Thrifty Introvert newsletter and get money tips and weekly motivation straight to your inbox!
The important thing is to not give up and always remember your “why”.
Trust me, you too can become a budgeting pro!
You’ll spend a little too much here or there and go over budget occasionally, and that’s perfectly okay. After all, you’re only human!
Don’t view budgeting as a punishment.
In fact, it sounds contradictory, but paying attention to what you spend is actually a step towards never worrying about money ever again! You’re building up your savings for emergencies, retirement, a sizable down payment on a house, and you’re closer to becoming debt free.
Ultimately, creating a budget give us a little peace of mind, knowing that we WILL be able to leave our financial worries behind.