Budgeting for beginners can seem daunting.
It forces you to face your finances, when you’d really much rather swipe that credit card and pretend your mountain of debt doesn’t actually exist.
Sorry for the reminder.
But if you can get past the initial terror of taking a peak into your bank account, you’ll realize how much a monthly budget can actually benefit you.
In a world where we mostly use credit cards and choose not to think about the very real cash that is flowing out of our accounts, a budget makes those imaginary numbers more concrete.
It also refines your financial goals, and makes the light at the end of the student loan tunnel that much brighter.
If you’re still scared to take the plunge, then ease your worries with this 7-step guide to budgeting for beginners. By the end, you’ll have made your first monthly budget!
Budgeting for Beginners: A 7-Step Guide
1. Open an Excel Sheet
A successful budget calls for some pretty good organization.
You’ll want to make sure you avoid messiness at all costs, considering you’ll be working with so many numbers.
The last thing you want to do is budget for $200 dollars a month, when really you only have $20. Organization matters, people!
This is why I shy away from pen and paper spreadsheets, and instead use Excel on my computer.
I’ve always been a fan of Excel, for a number of reasons:
- The spreadsheet is already laid out for you with uniform-sized boxes
- You can make the boxes shorter or longer to fit all your text
- The sheet is literally endless, so you can always add on
- If you forgot to add something in a previous box, you can simply insert a new row or column
- Excel has certain functions that will add and subtract for you (more on this later)
So open an Excel sheet, and organize the rows and columns in a way that makes most sense to YOU.
(You will want to account for an income section, a fixed expenses section, a discretionary section, and a budget section.)
For example, I tend to write the months across the top rows, and then I write the above sections in the lefthand column.
Of course, if you’re more comfortable with flipping this order (different sections going across in a row, months going down in a column), then be my guest.
2. Figure out your monthly income
You can’t know how much you have to spend, without knowing how much you’re earning.
Accordingly, your first section should be your monthly income.
In your Excel sheet, plug in each source of revenue, and how much money you earn from it.
If you only have one job, then it’s pretty straightforward.
I, on the other hand, have a bunch of side hustles whose irregular pay I end up estimating based on prior months:
- VIPKID: $1000
- Upwork: $200
- Tutoring: $200
If you want to know more about my highest paying side hustle, head over to The One Side Hustle I Use to Pay Off Student Loans and Travel the World.
(And if you’d rather dig into my secondary side hustles, check out 5 Legit Ways to Make Money from Home.)
Total everything up, and this is your magic number!
When you see your total, you may be feeling pretty good.
You may even think: Budgeting isn’t so painful!
Unfortunately, this feeling will only last until the next step.
3. Figure out your monthly expenses
Now, you can list your fixed expenses (i.e. electricity, gas, cable). While these monthly expenses shouldn’t change too much from month to month, there are a few that may vary, like your groceries.
I’m luckily living at home for the summer, so I don’t have to worry about rent, gas, electricity, groceries, etc. until the fall semester begins.
This makes my only fixed expense my student loans:
- Student Loans: $517
If you’re not sure how much everything costs, go into your banking documents from the past 3 months, and find the average of each expense.
Use these averages until next month, when you have something more concrete.
NOTE: You will want to be precise, so that your budget will also be as accurate as possible.
4. Set your financial goals
Step away from the Excel sheet.
Before adding your discretionary expenses, before subtracting anything, just take a second to figure out what you want to accomplish with this budget.
Are you trying to…save up for an emergency fund? …pay off student loans faster? …save for a house?
First, write down these goals, and then break them up into actionable steps:
My main goal is to get rid of student loans as fast as possible.
While this is a noble attempt at a goal, it’s not specific enough to be able to make concrete steps toward achieving it. Let’s try:
My main goal is to get rid of my private loans before I graduate with a PhD.
Okay, we’re getting there. Now, add quantifiable numbers:
My main goal is to get rid of $44,774.77 of private loans at an interest rate of 4.490% before I graduate with a PhD in 5-6 years.
NOW we’re talking. With a goal as specific as this, I can break it up into actionable steps.
Using Student Loan Hero’s monthly payment calculator (which accounts for the interest rate), I discover that to achieve this goal, I need to pay between $711 (if I graduate in 6 years) and $835 (if I graduate in 5 years) per month.
This means I’ll have to pay between $194 and $318 MORE than my minimum payment to achieve my goals.
Since I’d rather be done with my loans sooner, I’ll go with $318.
Now that you have your actionable steps for your financial goals, think of them as expenses.
Head back to that Excel sheet, and add these expenses to the list:
- Student Loans: $517
- More Student Loans: $318
Breaking up your goals into actionable steps, and then regarding them as expenses actually works.
For proof, head over to my testimony of How I Paid Off $10,000 in Student Loans in 6 Months.
5. Figure out your discretionary expenses
These are essentially any expenses that aren’t fixed.
If your mandatory expenses and your financial goals take first (and arguably second) priority, then your discretionary expenses are at the bottom of the list.
They include…well…anything that’s not fixed: clothes, gifts, eating out. It even includes, dare I say it, travel.
Wow that hurt.
Anyway, determine how much money you think you’ll spend on these discretionary expenses per month (again, use the average of the past 3 months if you’re not sure), and plug them into Excel:
- Eating Out: $40
- Nightlife: $40
- Shopping: $100
Take a sigh of relief, because the data collection is over…but the budgeting is just about to begin.
6. Subtract your expenses from your income
My income is about $1400 a month.
My fixed expenses, financial goals, and discretionary expenses added together are about $1015.
Since I have a positive number, this means I make more money than I spend.
With an excess of $385, I can reevaluate my budget to add more financial goals, or I can REALLY treat myself with a few weeks in Europe.
My numbers are all pretty straightforward, but since you should be as accurate as possible, down to the last cent, the math can get a little messy.
To make sure you’re not adding or subtracting incorrectly, you can use functions in Excel that will do the work for you.
- Go to the empty box where you want to see the total of whatever you’re adding
- Determine which cell numbers correspond to the numbers that you want to add (for example, A5 to A10)
- Write: =SUM(cell#:cell#)
And that’s it! There’s also an “automatic” way of doing this, but it takes way more steps and seems trickier to use.
- Go to the empty box where you want to see the difference
- Determine which cell numbers correspond to the numbers that you want to subtract
- Write: =SUM(cell#-cell#)
(NOTE: you will be replacing each “cell#” above with the actual cell number, like B5 or A2.)
If, like me, your difference is positive, then you’re spending less than you’re earning.
If your difference comes out to 0, that means you’re breaking even, or spending just as much as you earn.
And if your difference is negative, then you’re spending more than you’re earning.
This is, obviously, not a good thing.
You should go back up to your discretionary expenses, and see where you can cut corners.
Reuse and recycle the clothing you already have instead of buying anything new, or at least shop at secondhand stores.
Make homemade gifts instead of buying expensive presents.
Meal prep so that you won’t be tempted to eat out when you come home from work tired and hungry.
And no matter how badly it hurts, hold off on that amazing vacation until you actually have enough money to pay for it.
(I have tons more tricks on cutting corners in 25 Simple Money-Saving Tips for Frugal Living Beginners.)
Yeah, budgeting is painful.
In addition to decreasing your expenses, you can also try to increase your income. Check out 5 Legit Ways to Make Money from Home for ideas.
7. Monitor your budget, and adjust when necessary
All of your hard work will have been for nothing if you never open this Excel sheet again.
You should get into the habit of tracking your expenses (I do so on the same sheet – perks of the endless Excel) to make sure you’re not going over-budget.
At the same time, it can be very easy to become so obsessed with your budget that you spend way too much time looking at that Excel sheet.
Trust me, I’ve been there.
Instead of going down either of these paths, make a budgeting schedule.
Set aside an hour or two on the same day each week to devote time to your budget. Write down your expenses and any changes to your income, and make sure that you’re still on track.
And of course, if your situation changes, adjust your budget accordingly.
Budgeting for beginners doesn’t have to be difficult. With these 7 steps, you can create a budget and start the path to achieving your financial goals!
- Get organized with an Excel sheet
- Determine monthly income
- Figure out fixed expenses
- List your financial goals and break them up into smaller, actionable steps
- Determine discretionary expenses
- Subtract the total of your expenses and goals from your total income
- Implement your budget, and adjust if necessary
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