In this post I’m going to walk you through, step by step, where to start with budgeting. For most its not the most fun process but its CRUCIAL to personal finance success!
Feeling overwhelmed? I’ve been in your shoes. Believe me. You want so badly to start taking the right steps on your personal finance journey but you have NO IDEA where to begin. You search online and people are talking about the envelope method, this thing called YNAB, 401ks, HSA, well you know what I mean. Its a foreign language.
You see the benefits but you may also need to get your significant other on board. This is certainly no easy task. Will people think you’re crazy? Honestly, they probably will. If you find your self in this situation check this out.
Don’t worry, I’ve been there. I’m still poked fun at because of my budgets or because I’m a personal finance nerd. Right now it may seem like a put down, but just wait.
Give it a few years and those same people will pull you aside and ask you for your thoughts or experiences on a specific part of personal finance.
If you feel overwhelmed, take a deep breath. Everything is going to work out. Now let’s dive in.
Understand why you are doing this
One thing you have to understand is that the most important thing about where to start with budgeting has nothing to do with numbers. The most important thing when it comes to all things personal finance is why you are doing this.
Whether its to relieve stress you are feeling now, wanting to build a better life for your family, or somewhere in between, knowing this is crucial to success.
Unless you enjoy this stuff, budgeting its going to get hard. You are going to want to give up. Budgeting, especially categorizing every transaction can become a really tedious.
You may take several days off in a row. By then a whole week of transactions has piled up and you just don’t feel like it. Next thing you know the end of the month is here and you just throw in the towel.
Being crystal clear on the reason why behind all this effort will make success much more likely.
This isn’t forever
Another vital piece of the puzzle is knowing that this isn’t forever. Sure I think its important to always track your expenses . However, for most, I’d imagine that you can loosen the reigns a bit after you get a feel for where your spending is at and how it aligns with your priorities.
To be honest I still track every expense in my budget. I find it too easy to just take my eye off the ball so have been doing this and don’t plan on stopping anytime soon. One very cool factor is how much data and insight I have over my spending after tracking it for 5+ years now.
Where to start with budgeting: the process
Budgeting can have such a profound impact on your life. It doesn’t take a ton of time, isn’t all that complicated and can help relieve so much stress!
I’ve went into more detail previously on how to develop a budget and some budget categories to consider. I’d recommend checking out both of those. Lets take a brief look at the steps to a budget so we can identify exactly where to start with budgeting.
Budgeting Step #1: Evaluate your income
The first step to setting a budget actually has nothing to do with your expenses. Income sets the maximum amount your expenses can be. Ideally your expenses are a good bit lower than your income. If you aren’t there I’m confident can you be soon.
Budgeting Step #2: Plan Your spending
After you know your income you can move onto the next step which is related to your expenses. While you could dig into past months to determine what your spending looks like I don’t believe that would be a good use of your time in the long run.
Instead, try and plan your spending for next month. Break your spending into different categories. Use your gut on how many categories is reasonable.
I’d lean toward starting with too many as this will provide the most insight into your spending. As you move down your personal finance path you could always simplify these categories.
Budgeting Step #3: Determine the gap
The final step is to compare your income and expenses. If there is a sizeable gap between the two (income greater than expenses) then I’d just live out the month and see what this gap looks like after you’ve actually spent the money.
If that gap you are starting out with is tight, or even negative, I’d keep a close eye on your expenses as you move through the month.
If I could choose a single focus for you and your personal finance journey it would be to grow that gap as much as possible. Not immediately, but over time.
Oh and keep in mind that there are several different types of budgets. Start with the most basic one described above but know you can always tweak your process to accommodate you and your lifestyle.
The missing piece of the puzzle is how you are going to actually track, categorize and total your expenses throughout the month.
How to track your spending
To me there are two variables to consider when determining where to start with budgeting and the method of tracking you use. The first is our level of desperation and the second is your technology preference.
I’ll discuss each of these in the context of two different paths you could take.
Path 1: Cash Budgeting & Envelopes
If you haven’t heard of the envelope system I’d check out this link. I’d recommend this method if you need drastic changes to your spending or are technology averse.
As you get started it may seem pretty detailed and a lot of work. Just remember you can always back off your budgeting techniques as you learn more about them.
Path 2: Utilizing an app, website or spreadsheet
This option is for someone that may not need a drastic solution to their spending but just wants to get a better idea of where there money is going. This is due to the fact that the delay between your transaction to you categorizing it may be several days. Alternatively, if you feel more comfortable with technology then I’d also take a look at some of my recommendations.
Where to go from here
I hope you’ve gained something valuable from this post. Budgeting is a cornerstone of financial success and it isn’t that hard to get going. I hope I have helped you answer your questions on where to start with budgeting.