Budgeting 101: A Simple Guide To Upgrade Your Finances

Last Updated April 13, 2024 by Davina Kelly

Looking to improve your finances? The best way is to master the basics, budgeting 101.

Creating a budget is simple maths. Income – expenses = net income. From your net income, you can save, invest, or pay off debt.

It can seem overwhelming at the beginning, I know, I’ve been there. But once you understand the basics and implement the best methods for you, managing your money will become easier.

Mastering these basics has helped me pay off debt, save a lot of money, and start investing.

This post is all about budgeting 101.

What Is a Budget?

A budget is essentially a plan. When you create a budget, you are creating a plan for your money for a defined period.

You will put this plan together based on how much money you expect to make, and spend and the goals you want to reach throughout the year.

Your budget gives your money direction, this way when you get paid you will know exactly where your money needs to go.

View your budget as a guideline to reach your money goals and ultimately create freedom for yourself.

Budgeting can have a negative stigma, some people may think it is boring or restrictive. But it doesn’t need to be. You can still do all of the things you enjoy.

Your budget is there to help guide you so you can still have fun while working towards your goals.

Benefits of budgeting:

Having a budget is a great tool, it can help you on your finance journey in many ways.

Reach your long-term financial goals
Stop overspending
Understand your spending habits
Prepare for emergencies
Plan for retirement
Pay off debts

Budgeting 101: How To Create a Budget

Determine Your Income:

When you create a budget the first step is to plan your income. Your income is the driver of your budget. It determines how much money you can afford to spend and put towards your goals.

You want to include as much detail as possible with your income. For example, include your pay frequency, the amounts you are expecting, your different income sources, etc.

If you are paid a fixed salary, planning your income will be easy as you will know how much money you will be paid each month or week. But if your income varies this can be a bit challenging to plan.

In this case, you can use estimates or averages based on the amount of money you have been paid in the past. For example, if you have been paid $400, $500, $600, and $550 over the past few weeks you can budget an average of $500 income each week or $2,000 each month.

List Your Outgoings:

To create an effective budget you need to make a list of your outgoings. Your outgoings will eat up a large chunk of your budget so it is crucial that you get this part right.

Review the last 3 – 6 months of your bank statements. You can log into your bank online to view these.

I recommend separating them into essential and non-essential expenses.

Essential Expenses:

Essential expenses are the expenses you need to pay to live.

Rent/Mortgage
Utilities
Groceries
Transport
Health costs

These expenses are usually fixed amounts, so I recommend setting them up on auto-pay if you haven’t already.

Non-essential Expenses:

Non-essential expenses are more of your lifestyle costs, your fun money. The expenses that you pay for but can survive without.

Netflix
Internet
Amazon Prime
Clothes
Eating out

Analyse What You Are Left With

Once you know your income and expenses, the amount you are left with can be put towards any financial goals you may have.

For example, if you want to pay off any debt or save some money you will be able to do it from this chunk of money.

If you find that you don’t have a lot of money left over, you will need to reassess your outgoings and see where you can make any improvements.

This may mean cutting back in some areas. For example, if you are spending $100 on eating out you can reduce this amount and put the extra money towards your goals.

You can use my free printable budget and expense tracker to help you get started.

Set a Goal:

One of the great benefits of having a budget is that you can set goals for your finances and create a plan to reach them.

I recommend setting a goal for your finances when you are just getting started. You can keep it simple, it doesn’t have to be a big goal.

For example, your goal could be to pay off debts or save for an emergency fund.

When you set your goal it is important to make it a smart goal. The key areas you want to focus on are making sure your goal is measurable and timely.

For example, it isn’t enough to just say you want to save $10,000. You need to be specific and have a deadline for reaching that goal.

A better goal would be to save $10,000 in a year, this goal is measurable and timely. To reach this goal you will need to save $833.33 a month.

Now that you are clear on your goal you can include it in your budget. This is the power of having a budget, it will allow you to make detailed plans to reach your goals.

Having goals for your finances will keep you motivated and you are more likely to stick with it because you are working towards something. It can also help to keep you on track when things get tough.

Choose a Budgeting Method:

Now that you know what makes up your budget it is important to choose the right budgeting method. The budget method will guide you on how to divide your budget.

There are different methods you can use, there is no right or wrong method you need to choose what works best for you.

Here are the most popular budgeting methods.

Zero Based Budget:

The zero based budget method is where every dollar is allocated and each month you start from zero.

For example, if you make $2,000 each month every single dollar is allocated to an area of your budget.

This is a good method if you are a beginner as it is straightforward and it is a good way to ensure none of your money is wasted.

50 30 20 Budget:

This is probably the most popular method and is good for beginners as it simplifies everything. See how it works below.

50% of your budget is allocated to your needs. This would be your essential expenses as mentioned earlier like rent, utilities, groceries, etc.
30% of your budget is allocated to your wants. Things like vacations, entertainment, eating out, etc
20% of your budget is allocated to savings and debt repayment.

If you made $2,000 a month and you wanted to save for a holiday, put some money towards your emergency fund and pay your bills it would be split as follows.

Put $400 in your emergency fund
Allocate $600 towards your holiday fund
Use $1,000 to pay for your essential and non-essential expenses

This is a good framework to follow, but I would adjust it slightly. I would allocate 30% to savings and paying off debt and 20% to needs.

I think saving and paying off debt is more important than spending money on wants.

Pay Yourself First:

The pay yourself first budget method prioritises things like savings, retirement and paying off debt. Rather than allocating money to your expenses and seeing what is left, you treat saving like a bill. This is also referred to as the reverse budget.

This budgeting method could be good for you if you want a more relaxed approach to budgeting. As you are prioritising your financial goals, covering your bills and not taking out more debt you can spend the rest of your money as you see fit.

All of these budgeting methods are good frameworks to follow, if one method stands out to you then you should try it.

If not, you could take inspiration from one and create your own. For example, you could use the 50 30 20 budget framework but change the % allocations. Or you could use a combination of them all.

Something to keep in mind is that if you try one method and it doesn’t work you can change it. Don’t feel like you are married to one method just because others find it easy to use. It is about finding what works for you and that will take trial and error which is perfectly fine.

Create a Finance Routine:

Once you have your budget in place it is crucial to maintain it. You need to review your budget regularly to check your progress, to do this I recommend creating a finance routine.

What is a finance routine?

A finance routine is where you set time aside either weekly or monthly to update your budget and reflect on your progress. During your routine, you will do the following things.

Update Your Budget:

Go through your bank statements and update your budget with your actual numbers for the period. Input how much money you received and how much you spent in each category.

Reflect on Your Progress:

You will also reflect on how you performed, and see if there are any areas you can improve on. Ask yourself, are you happy with your results? Did you spend in the way you wanted to?

For example, if you can see that you spent a lot of money on eating takeaways you may want to avoid that next month. When you are reflecting on your finances you can think about why you overspent on eating out.

Was it because you didn’t go grocery shopping? Or are you out of ingredients to cook the meals you usually enjoy?

Once you know the answer you could create a solution to mitigate the problem. For example, If it was because you didn’t go grocery shopping you could take inventory of what you have at home. Then think of some meals you would like to cook, make a list for the grocery store and go grocery shopping.

Update Your Budget For The Next Month:

Next, you will update your budget for the next month. You should factor in any plans you have coming up into the next month’s budget. For example, if you have travel plans, factor that.

If there were areas where you wanted to improve you should also include it in the next month’s budget.

Include Resets:

It is important to include rests when you have a budget as throughout the year things will change and you want to adjust your budget to reflect those changes.

For example, you could get a pay rise or your rent could increase. Both of these scenarios will impact your finances so you should include them in your budget.

This will make your budget agile and allow you to reach your financial goals faster.

Having a finance routine will keep you accountable, it is a follow-up system. This will help you stick to your budget.

Your routine can be done weekly or monthly. I recommend doing it weekly, to begin with, then once a month when you are more familiar with the process.

Choose Your Finance Tool:

To manage your budget effectively you need to use a tool. This tool will allow you to put your budget together and track your progress. Tracking your progress is the most important part of your budget tool as this is where you will be able to make improvements.

This could be done with a budget spreadsheet, an app, or a notepad.

Most banking apps will track and categorise your spending automatically, however, Apps will remove a layer from you and your finances.

I recommend using a budget spreadsheet. The benefits of a budget spreadsheet are that you can customise it to your liking and you can build on it.

Using a budget spreadsheet will require you to be involved in the detail as you will need to update it. Doing this will encourage you to be more intentional with your money.

You can purchase a ready made template on Etsy or you could create one yourself if you are good at using Excel or Google Sheets.

The important thing is to choose the tool that is right for you and one that you will actually use.

Audit Your Finances:

Auditing your finances is the process of going through all of your finances with a fine tooth comb. You want to ensure you are aware of everything that makes up your finances.

Look through the following.

Current/checking accounts:

Check every current account you have open and make a note of the balance you have in each account. I recommend closing the ones you are no longer using.

Direct debits:

Make a list of all of the direct debits you have set up and the date they leave your account.

You should set them up to leave your account on the same date. If you are paid a monthly salary this will be easy, you could choose to have them leave on the same date you are paid.

Debts/Credit Cards:

You want to ensure you are aware of all of the debt you have and the remaining outstanding balances. Check all of the credit cards you have open and the balance on each account. Make a note of the date payments are due for each card.

Subscriptions:

Go through all of your subscriptions and the date they are due. While you are going through this process I would recommend cancelling any subscriptions you no longer need.

If you have multiple accounts and credit cards you may not be aware of when the payments are due which could lead to you incurring late fees.

The purpose of auditing your finances is to ensure that you are aware of everything you have going through your accounts so that you can stay on top of it.

Spend Smarter:

When you have a clear understanding of your finances you can make an effort to spend smarter. You can still do all of the things you enjoy like shopping, but you can do it in a smart way.

For example, if you like shopping you can create a shopping fund that you contribute to each month. There are many sales throughout the year like end of season sales, Christmas sales, New Year sales etc. You could wait until one of them is on and shop guilt-free.

If you pay for services like the internet or cable when they are due for renewal you want to negotiate a better deal.

Companies always want to retain their customers so if your account is in good standing they are likely to offer you a deal. If that fails you can look on price comparison websites and get the best deals in your area. This is the site I use all the time click here

Spending smarter isn’t about being stingy, it is about ensuring you are getting the best possible deals. Why spend more on clothes when you can buy the same items at a discounted price if you plan for it?

Once you become aware of spending in this way you will automatically start to pay attention to deals and discounts.

Challenges When Budgeting:

Creating a budget is one of the best things you can do for your finances, but it can be challenging at times. Maintaining your budget takes time and effort and sometimes you may not want to do it.

Here are some of the challenges you may face and how you can overcome them.

Boring:

To have a successful budget you need to maintain it and this isn’t the most exciting thing to do. Once you have chosen your budgeting method and have your tool in place, maintaining it will take less than an hour each month.

You could stack maintaining your finances on top of a habit you enjoy. For example, you could watch your favourite show afterwards. This way you will feel like you will be rewarded with something you enjoy after doing something that you don’t enjoy so much.

Overwhelming:

Having a budget can be overwhelming in the beginning, especially when you are setting everything up. While the maths isn’t hard, assessing your situation and cutting back on your spending can be tough.

But I promise once you start doing it consistently it gets easier. The key is being organised so once you stick to your maintenance you will be fine.

Restricted:

In the initial stages of setting up your budget, you may feel restricted because you have to adjust your spending. This is totally understandable, it was challenging in the beginning for me too.

But this is why I believe it is important to still include the things that you enjoy in your budget and not cut them out completely. You can still go shopping and eat out, but you will do it within a budget.

In those moments when you feel overwhelmed or restricted, it is important to remember why you wanted to create a budget and the goals you have set for yourself.

Mindset When Budgeting:

When you begin budgeting it is important to have the right mindset. See your budget as the beginning of taking control of your financial future.

Visualise what your future will look like, the freedom you will have and think about how that will feel. If you stay consistent with your budgeting strategy these things can become a reality.

If you have to cut back on spending don’t view it as a loss, think about all of the things you will gain in the future. Whatever your circumstances are, even if you are swimming in debt believe that you will be debt-free.

Everything begins in the mind, so believe that you can achieve all of your money goals and more and you will.

Budgeting 101 Additional Tips:

Utilise a High-Interest Savings Account:

If one of your finance goals is saving money I would recommend using a high-interest savings account. This is a great way to grow your savings as you will earn money from interest which will increase your savings value.

The interest rates on savings accounts are high currently due to inflation, so take advantage while you can.

You can open an easy-access account if you want access to your savings within a year, you could use this account for your emergency fund. Or you can opt for a fixed-term account if you want to leave the savings for the long term.

Ensure you pay attention to the terms as you can incur a fee for withdrawing your money early.

Use Different Accounts:

A good way to gain some control of your money is to use different bank accounts. This may seem alike a lot but it can be simplified.

You can separate them as below.

Current/Checking account:

You can use this as your cash flow account. This is the account you will get paid into, pay your bills and essential expenses from and transfer any money out.

Savings accounts:

I recommend having a separate account for your savings. This way it is completely separate and you won’t be tempted to use it.

As mentioned above you can open a high-interest savings account for your short and long-term savings.

Current/checking account 2:

For your expenses like groceries, travel, eating out, etc. I recommend transferring the amount you budgeted for each category into a different account.

This way you will be spending within your budget and it may encourage you to be more conscious as you will be spending within a limit.

Final Thoughts:

Budgeting can be overwhelming in the beginning, but it is a powerful tool for your finances.

Once you choose the right strategy for you, review your progress each month, and stay consistent you will improve your finances.

I hope you have found this helpful. Have you started budgeting? If so, how is it going?