How to Budget Money Effectively: The Definitive Guide for Beginners

How to Budget Money Effectively: The Definitive Guide for Beginners

How to budget your money effectively?

Did you know that…

>On the recent study of pymynts.com, it was found out that 6 over 10 of Americans are living  paycheck to paycheck.

>87% of families have an average debt of $135,768 in December 2018?

>60 percent of millennials don’t know if they can pay their outstanding debts?

Did you know what that statistics mean? They only have one thing in common and that is improper management of money.

If you don’t want to be considered on that statistics, then propably you should continue reading this article which tackles how to budget your money.

Well, learning how to budget has a massive impact on your financial goals whether to increase your savings or investments, reduce your debts, and so on.

In addition, learning how to budget controls your day to day finances from personal expenses to household expenses.

how to budget

©2020 Finance Talk PH

Before we get started, let’s first define budget.

What is budget?

Budget is a written record that presents your cash inflow and outflow in a specific period of time whether weekly or monthly.

In some other words, a budget allows you to have full control of your monthly expenses. 

Furthermore, a budget helps you reduce your expenses, decide how to spend your earned income, pay off your existing loans, plan for your future and eventually increase your savings.

In short, you should know how to budget because of its dynamic benefits when it comes to your financial goals. Creating a budget is not an easy task and sticking to it is extremely difficult.

Moreover, if you planned a realistic budget, you will see your life moving forward to financial success. Isn’t it amazing? That is why you should definitely know how to budget.

Are your goals found on this list?

✓Increase monthly savings

✓Buy a brand new car

✓Buy your dream house

✓Travel to your dream destination

✓Pay off credit cards and other debts

✓Invest in stocks, and other investments

✓Buy iPhone Pro 11

✓Save for retirement

✓Build and start a business

✓Save for plastic surgery in South Korea

✓Get new facial

✓Buy your favorite clothes and shoes

✓Renovate your house

✓Buy life insurance, and health insurance

✓Enroll in college and start a career

✓Become the next Jeff Bezos

Are any of these your goals? If so, you should now start creating your own budget for you to achieve your goals. Making your own budget will lead you closer to your goals that’s why you should definitely learn how to budget.

If you’re dedicated to your budget, I’m pretty sure you will have a peaceful and better life in the end and at the same time you will see and discover the real meaning of life.

Before you start making your own budget, the very first step you have to do is to determine your financial goals just like the goals mentioned above. In this way, you will become more dedicated and motivated to the goals you have.

The main goal of this post is to help you learn how to budget your income so you should definitely bookmark this page.

What you need to make a Budget?

how to budget

A notebook or journal and a single pen is totally enough. However, if you have a computer or gadget, then make use of it. Use your own resources.

If you have your own computer, I highly recommend you to make use of Microsoft Excel. It’s a software where you can easily make your own budget. You just have to enter the data on the cells and make use of the other tools.

On the other hand, if you have your own smartphone, you can make your own budget using a reliable and easy to use app. 

All right. Let’s now begin!

Quick and Easy Steps How to Budget

1.Understand your current financial situation

Before you start making your own budget, you have to fully understand your current financial situation for you to fully develop and establish a realistic budget. 

how to budget

Check your assets

First, you have to think and check all things that you have or we can call this as your personal assets. This includes your car, home, job, bank accounts, investments and so on. Just think on those assets that you fully own. 

Determine your income

Second, determine how much income you receive each month. Your income is your best overall asset that has the greatest impact on your budget. Any amount of money you receive weekly or monthly is considered as your income. 

how to budget

7 seven types of income:
  • Passive Incomeincome you receive from other jobs or business
  • Dividend Income – income that you receive from your stocks investment
  • Earned Income – income from paychecks
  • Capital Gains – income from selling appreciated assets
  • Interest Income – income from savings accounts, bonds and other deposits
  • Royalty Income – income from own creations or inventions
  • Rental Income – income from renting your properties

If you have all these income streams, I’m pretty sure you have lots of bucks every single month. That’s what everyone wants to achieve. Right?

Identify your spending

Third, you have to identify your total spending. Do you spend most of your money on food, and shopping? You have to identify and list your spending on a piece of paper. In this way, you will be able to identify where you spend your income the most. 

You have to know where you spend your money because if you don’t, you will end up living from paycheck to paycheck which is extremely I don’t recommend.

Identify monthly expenses

The fourth step you have to think is your monthly expenses. This includes your grocery, house bills, insurance, rent, and so on. List your expenses on a piece of paper together with your spending.

Check your existing debts

Here comes the depressing part. This are your debts. This may include your student loan, credit cards, mortgage, house loan, car loan and whatever loan you have. Identify them and list them on a piece of paper.

After completing the steps mentioned above, let’s now assess your financial situation.

If you discovered that you have more assets than liabilities, I would like to congratulate you mate. The less liabilities you have, the lesser your chance of becoming broke.

Moreover, if your income exceeded your debts, you’re now ready to the next step. However, if your debts exceeded your income, you have to do anything to lessen your debts. Your debts might eat all your income.

“When it comes to budgeting, it is not the amount that matters. Rather it’s the habit.” -Stefan James

After understanding your current financial situation, you’re now ready to take the next level of budgeting.

2.Choose your preferred tools to make your budget

If you want to make your budget quick and easy, I highly prefer you to make use of online tools. This tools helps you automatically budget your money without any technical skills. Here’s the top budgeting tools I highly recommend to everyone.

PocketGuard

PocketGuard is the best budgeting app you can find online. Why? It automatically creates a budget for you. You just have to enter the amount of income you receive each month and your financial goals you want to achieve. And Boom! There you go! It also tracks your monthly income, deposits to your savings accounts, your monthly expenses and more. However, the downside of this budgeting app is that you have to pay an amount before using the app. 

Mint

Mint is one of the best free budgeting app you can find online. It offers you a wide array of features for you to easily track your money from different banks, lenders, credit card issuers, and other financial institutions. The advantage of using Mint app is that it notifies you when you over budget your money. In that case, you have to reassess your budget again.

Wally

Wally is definitely a free budgeting app that helps you track your monthly income and expenses. In addition, it also offers foreign currencies so that people from other countries can easily use the app to ease their budgeting. If you want to use Wally to make your own budget, you can download it on Google Playstore and the App Store.

Quicken

Quicken is one of the best personal finance software today. It doesn’t only help you on your budget but it also helps you manage your debts, saving goals, and many more. Another awesome advantages of using Quicken is that it allows you to pay all your bills in just few clicks and it also helps you calculate your total net worth. This software is not free and you have to pay to use this software.

So that’s the best free and paid tools you can use to easily make your own budget. Choose what your heart desires.

3.Evaluate and Assess your Budget

After making your own monthly budget, it’s not yet over. You have to evaluate and assess it before implementing it. If there’s any errors and mistakes, you have to check it and find a solution. If your expenses are higher than your income, try to lessen your expenses and get ready to take some sacrifices.

Budgeting Methods

In this part are the commonly used budgeting methods you can use for you to make your own perfect budget. Choose the method you’re comfortable with.

50-30-20 Budget

In this method, 50% of your monthly income will go for your personal needs (ex. food) while the 30% goes for your wants (ex: travel, shopping, leisure, entertainment, etc.). The remaining 20% of your income goes to your savings accounts. Always remember to prioritize your savings because at the beginning, you have your financial goals you want to achieve.

Example

Monthly IncomeP80,000 ($1600)
SavingsP16,000 (320)
Emergency FundP5,500 ($110)
GroceriesP10,000 ($200)
RentP14,500 ($290)
UtilitiesP10,000 ($200)
Car PaymentP10,500 ($210)
Travel FundP5,000 (100)
Cell phoneP500 ($10)
EntertainmentP2,000 ($40)
ClothingP3,000 ($60)
InternetP3,000 ($60)

Take note that this is just an example of a budget using the 50-30-20 budgeting method. You can customize this table depending on your own expenses.

Envelope Budgeting

This very popular budgeting method is super quick and easy to do. In short, this method helps you allocate your income for you to avoid overspending. The main advantage of using this method is that it controls your spending habits. Once a category is empty, you can’t spend from that category until your next salary comes in.

how to budget

How to use envelope budgeting method?

  • First of all, you need at least 5 envelopes or more depending on your expenses. 
  • Get a pen and write the category on each envelope.

Example:

Envelope 1: Travel Fund

Envelope 2: House rent

Envelope 3: Cable Subscription

Envelope 4: Groceries

Envelope 5: Car Payment

Some Additional Category

Gas/Electricity

Internet

Insurance

Water/Sewer

Prescriptions

Loans/ Credit Cards

Gym Membership

Mortgage

  • After writing each category on the envelope, insert your desired bills on each category. Remember to prioritize your needs over your wants and always never forget to limit the costs. That’s the number one rule.

Example:

Envelope 1 (Travel Fund): P5,000

Envelope 2 (House Rent): P5,000

Envelope 3 (Cable Subscription): P500

Envelope 4 (Groceries): P3,500

Envelope 5 (Car Payment): P3,000

  • The last step you have to do is to spend from the envelopes. Whenever you go shopping or pay your bills, take the money from the envelopes. Remember to stick on each category. Never attempt to get from other category or else you’re just fooling yourself.

Suggested:

20 Easy Tricks to Save Money in 2020

15 Financial Advice From Wealthiest People in the World

Now you know how to budget your money. I hope this ultimate guide helped you make your own budget. 

Conclusion

Budgeting is not only for those who earn high paychecks rather budgeting is for everyone. It doesn’t matter how much you earn. The important thing is you know how to budget your income.

 Budgeting is a simple technique that helps you easily manage your money and know how your money is being spent every after each paycheck.

If you want to achieve all your financial goals, all you have to do is to manage your money in a right way. Budget! Budget! Budget! This is the only thing you have to do to avoid overspending your money. 

You should be very careful on your money because it’s your biggest asset. If you don’t manage it properly, it will go away and will never come back just like your crush.

In summary, knowing how to budget is extremely important because it helps you act like a business. It treats your personal finances as a business, you know exactly how much is coming in and you have a very good idea of how much is coming out which helps you build a more realistic budget and it allows you to allocate every single amount of your money into investments or assets that will eventually help you build wealth.

I hope this how to budget guide helped you make your own budget. Thanks for reading!

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Arris Gawe

G'day mate! Hi! I'm Arris Gaweauthor and content writer of Finance Talk PH, a personal finance blog that helps  futuristic individuals achieve their financial goals in life. I'm also a financial advocate, stock market investor, traveler and copywriter.

This Post Has 19 Comments

  1. Louise

    This was a really interesting read. I wish I could stick to a budget but being self-employed I earn totally different amounts of money each month so it’s really difficult. But I always try to use 50% of my pay for my rent and bills etc, 20% goes into a savings account, and the the rest I use for little treats such as takeaways or taking the kids to the cinema etc.

    Louise x

  2. Maysz

    Budgeting is so important nowadays because of pandemic many people have no work because of crisis so is so important to save money to buying needs like food.

  3. Eloise

    Wow, those stats are shocking! I didn’t know the average debt was so high, yikes!
    Great info for those to follow to become financially stable… I like the idea of the envelopes!

  4. Monidipa

    This is a very detailed article. I do my own budget too. Since budgeting allows you to create a spending plan for your money, it ensures that you will always have enough money for the things you need and the things that are important to you. Following a budget or spending plan will also keep you out of debt or help you work your way out of debt if you are currently in debt.

  5. Salmotus

    Interesting budgeting methods! I think the 50-30-20 method is a nice ratio to divide your money into what you need, what you want, and what is important.

  6. Zen

    These are so helpful!
    I’m always looking for tips on how to budget!
    It’s hard when there’s only 1 main income in the household but it’s definitely easier with money saving tips!

  7. Arris Gawe

    That’s absolutely right.

  8. Ramil Hinolan

    Thank you for sharing this financial tips. All of us need to budget what very little that we have for the unexpected expenses..

  9. Ramil Hinolan

    Thank you for sharing this financial tips. This is timely considering that many lost their jobs because of the lockdown.

  10. Arris Gawe

    That’s great but you must definitely increase your source of income.

  11. Marta

    Very helpfu article and very well written, easy to folow. For me budgeting our money was never a problem, as a I have a degree in Economics and one of my subject was Personal Finance that thought us how to manage our money. We are a two income family with 3 small children and no debt. We do not own credit crads and spend just one paycheck a month, the other one goes in to savings and invesments.

  12. Bailey Deziel

    These are some really great budgeting tips. I definitely live paycheck to paycheck. It’s an issue lol. I’ve been working on trying to budget my money more responsibly so I’ll definitely be saving this post for future reference.

  13. CA

    Thanks for all of these tips! I’m really trying to fix my finances lately. I am even trying to compute for my net worth. Will start from here.

  14. Kathy Kenny Ngo

    For me, what I learned is that you need to take out the savings first and then whatever is left will be the amount you spend.

  15. Arris Gawe

    You should definitely teach him while he’s still young for him to become financially independent when he grows up.

  16. Cynthia Hoover

    Excellent budgeting tips. I may use the envelope method for my son, he seems to think money grows on trees.

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