Beginner’s guide to budgeting
The following beginner’s guide to budgeting is one of the early articles written by my daughter shortly after she finished college.
In it you will find a solid beginner’s guide to budgeting – it will cover how and why budgeting is a great idea.
If you have read chapter one of The Entrepreneur Experiment it details how I struck a deal with my daughter.
I’d provide her a monthly allowance if she would research and write weekly assignments on the topics I gave her. I hoped that she would learn something for herself from being exposed to these subjects – the kind of life topics they don’t teach us at school.
It felt a better solution than providing free financial support.
I’m sharing the articles in the hope that they are helpful for people just getting interested in the topics covered.
Because they represent a good summary of information someone new to the topic would discover. hopefully more interesting and relevant coming from a beginner – than from some self-declared expert!
Budgeting is a useful tool that allows you to plan and prioritize your spending. So that you can use your money for things that are the most necessary and important and also be able to stick within your means.
Budgeting does not need to be complicated, all it takes is a notepad or a spreadsheet and commitment and dedication.
Using a budget helps you plan your spending because it is quite easy to not quite realize what your income is and exactly how you spend your money.
If you don’t have enough money to do everything you would like to do, then you can use budgeting to prioritize your spending. Focus your money on the things that are most important to you.
Budgeting is especially necessary if you are in debt as it will help you to save up your money and allow you to escape from that debt.
It is also useful for financial goals such as if you are saving for something like a car or a vacation. Also more long-term plans such as buying a house or starting a business. Even if you are not aiming for any of these it is still a good opportunity to spot potential money-saving opportunities. To be more resourceful and less wasteful with your income.
When you budget you may work out that you have either a surplus or a spending deficit. If you have money left over from your income once you have taken away your outgoings then you are in surplus. You should either pay off any debts you may have or add it to a savings account.
On the other hand, if you spend more than your income, for example by using credit cards or digging further into an overdraft than you are in a deficit. You should use a budget to reassess and re-prioritize your spending in a way that is less frivolous and less likely to lead to debt.
When you are working out your budget you should include every expense to try and make it as accurate as possible. Included small expenses like eating out. Once your budgeting you might realize that your Starbucks a few times a week is draining your income much more than you realized as it all adds up.
There are various times to do your budget, monthly, quarterly or yearly. One benefit of a yearly budget is that it takes into account the greater number of expense categories when it is constructed.
If you are constructing a monthly budget in August you are not including a category for Holiday spending. Or if it was December you would not be taking into account your summer vacation.
As well as this there is also periodic spending in the form of taxes and bills that may not occur monthly. So it is very difficult to account for in your monthly budget if they only occur a few times a year. However, with an annual budget, you can more easily account for this periodic spending.
However, if you are dedicated enough you can divide irregular spending into a monthly budget. You do this by taking one-off expenses such as the Holiday season and dividing it into 12. Then adding this to your monthly budget so you know to account for this in your monthly spending. It would also be helpful to put this into a separate account such as a savings account to simplify things and avoid accidentally spending any of it.
A particularly vital time to check your budget is if there have been any big changes to your financial situation. If your income increases or you pay off debt then you should reassess your budget. A proportion of extra cash flow can be invested or added to savings or retirement funds. It is especially important if your income decreases or you have a new big expense to consider. You do not want to ignore your change in cash flow and keep on spending in the same pattern, then find yourself short on money. In this scenario, budget reanalysis should lead to cutting excess and unnecessary spending to save money.
Quarterly should be ample enough to review your budget and revisit any goals that you have made financially to see if you are on track.
However, if you are in debt or especially keen to save then it is useful to review your budget monthly. Monthly budgeting can be especially helpful in discovering detrimental spending trends. You can then reduce costs from month to month.
Whilst this might seem over-keen the more familiar you are with your budget then the more familiar you will be with your weakness. Particularly regarding where your levels of unnecessary spending are. The payoff will be worth the effort if it saves you money or avoids debt. If you look at your previous month’s budget, you can see where it was achievable and where it didn’t quite work for you. Then you can adjust and improve it so that in the next month it is more useful.
It is important to note that constantly checking and worrying about your finances might be too exhausting. It is beneficial to find a line between financial stability and freedom.
Stringent analysis that is too tiring and stressful.
My favorite resource for budgeting is Monzo which is a very modern bank that comes with an app. Instead of getting monthly statements online banking platforms like the Monzo app send instant notifications to your phone. This highlights your incoming and outgoings. When you pay by card it is easy to spend and especially easy to overspend and daily unthinking transactions all add up.
When Monzo sends you a phone notification every time you buy McDonald’s or unnecessary clothes. That makes you think twice about frittering away your finances and keeping within your budget. A further useful resource is that Monzo categorizes each instance of spending into groups. Like eating out, groceries or bills and at the end of each month you can see how much you have spent in each category. This allows you to assess your budget and any overspending you do in certain categories. That’s harder when you are using normal bank statements that are not separated into these areas.
The app allows you to set a monthly budget and furthermore you can set spending limits for things like going out or entertainment.
The app also tells you what you have ‘left to spend’. This figure takes into account the money in your bank and also the regular bills and payments that have not yet been taken from your account. If you are overspending or it looks likely you will run out of money the app will send you notifications.
Monzo is an excellent budgeting tool that allows you to budget without even thinking. If you are as glued to your phone as most people in the 21st century, it’s simply impossible to not realize you are overspending with this app.
This is a basic finance tracking app that uses 3 categories based on the 50/30/20 rule. This is a basic rule to divide income where 50% is spent on things that are absolute needs, then 30% on things that you want and the last 20% is spent allocated to savings.
You can compare your current spending to the recommended target percentages. Then see if you need to alter your spending to match the amount you should be saving or investing.
Similar to Monzo, mint is a fun chance aggregation app. It creates budgets using the information from bank accounts, credit cards, debit cards, PayPal and bills. Unlike Monzo in which it just tracks the Monzo debit card spending, this app uses all your possible spending means. Additionally, loans and investments can be tracked through the app. Mint provides reports on things like debt, spending, income and even net worth. Also which is quite useful the service provides a free credit rating.
The budgeting feature of mint allows users to create their categories and these track budgets based on spending history. Budgets can be set for any period such as per week, month or year. If you go over your overall budget or a budget for a category mint will send you notifications.
This is a website that is aimed at students and has useful tips for how to successfully budget. One tip I found especially useful was that when you receive your student loan – transfer it into a separate account. Then set up a weekly automatic transfer into your main account. Having a weekly allowance prevents you from spending all your money too soon and developing bad spending. It also has a downloadable student spreadsheet that is very useful. This website has lots of helpful information particularly tailored to students. So it helps find information on how to manage a student budget.