Are you one of those individuals wondering by the month's end, where my salary went? Do you too have a fear of losing a job with countless expenses and zero income? Did your family have a financial emergency and you had to opt for a loan to overcome the situation? If your answer to all questions is yes then it's time to take the budget seriously. Don’t worry, you're not alone, around 70-80% of people have been struggling to manage their salary. We have got you covered, this blog entails a detailed roadmap of budgeting for beginners.
Unfortunately, the word "Budgeting” is considered a complex process, but in reality, it is just a plan to manage and control your income for future endeavors. Irrespective of different myths and opinions, the budget doesn’t take away your freedom to spend, it gives you freedom to control and direct your spending whether it is small or big expenses.
Whether you are aware of the budget already or are a newbie, the budgeting for beginners guide discusses effective methods to manage your money for the long term, how to create a budget, a few perks, and certain free tools as well.
Let us walk you through different aspects of budgeting for beginner's guide
- How to budget money on low income
- How to budget for beginners
- Importance of planning a budget?
- Perks of budgeting
- Budgeting tips
- Budgeting for beginners free
- Bottom Line
How to Budget Money on Low Income?
While budgeting is the ideal solution to fixing uncertain financial issues, budgeting for beginners that too with a low income can be a tedious job. Hence, a lot of individuals have concerns about how to budget money on low income. We have a complete breakdown step to your concerns, however, let’s first understand what is the budget for your better understanding.
What is the budget?
According to Dave Ramsay, Budget is when you tell your money where to go, instead of wondering where it went. Budgeting is the process of preparing a plan of expenses so that you don't have to rely on your debts for unexpected expenses. Additionally, a budget can be planned for a month, quarter, 6 months, or a year.
By preparing a budget, you get a clear idea of whether there is a scope for an international trip or a car. In addition, with a plan, you can prioritize your expenditures like rent, medical costs, and daily expenses and can allocate your money for a smoother financial experience.
Coming back to your question of how to create a budget and planning a budget on a low income, as we mentioned earlier, a budget gives you the benefit to allocate your money for different expenses. Even if you earn $3000 per month you can prioritize your essential expenses and based on that save up to $300-$500.
Sounds confusing? Let’s have a look at the detailed step of preparing a suitable budget for individuals with lower incomes.
1. Note your total income
The first step towards your question - how to budget money on low income is identifying your total income, which includes your regular salary or income from your business, deposits, side gigs, and other sources (if any).
2. Listing your expenses
When you are unaware of your total expenses throughout the months, that’s when the real problem arises. Listing different kinds of expenses will help you understand where your money is going exactly and accordingly, you can prioritize your spending and save money for emergencies.
3. Categorize your expenses into essential and not so important
One of the main reasons for being bankrupt in the mid of the month is people tend to spend a major part of their money on non-essential expenses. Meanwhile, when you have listed expenses in two columns you know where and how much money to allocate.
For instance, your essential expenses may include EMIs, home loan pay, rent, groceries, other bills, fuel costs, and more. Whereas, not-so-important expenses can include entertainment fees, dining out, luxury expenses, and more.
4. Focusing on deducting non-essential expenses
Once you have categorized your expenses, you know all of your non-essential expenses. The next goal must be deducting those expenses. You don't have to avoid these costs completely, for instance, if you have been spending more than 30% of your income on non-essential expenditures then you can reduce the percentage to 20-25% so that you can have more money at your disposal at the end of the month.
5. Save the leftover money
The ultimate goal for every budget is to save money for unexpected big expenses. After spending money on all your essential expenses, try to save the leftover money for a better and secure future.
How to budget for beginners?
A budget is possible for individuals with low income, but if you earn a decent amount of money and still struggle with saving money. Don't worry our budgeting for beginners guide will help you allocate money and understand personal financing effectively.
1. Finalize a Budget System That Works for You
How to create a budget is one of the major concerns of individuals today. Well, there are multiple ways of creating a budget, but as a beginner, the first step is to experiment, and discover a method that suits your lifestyle, and spending nature. Remember, the process of budget needs to be sustainable and easy, you should not feel pressured or exhausted in terms of allocating and saving money.
Let us see different methods that can help you decide viable options for you to practice.
The Rule of 50\30\20
The concept of this rule was introduced by Senator Elizabeth Warren. The 50\30\20 rule focuses on allocating money efficiently to help you save money for future benefits.
- 50% of income goes into your essential needs like rent, groceries, other important utilities, etc.
- 30% of income is allocated to your other wants like entertainment, shopping, dining out, and more
- And 20% of your income is dedicated to savings and other debts like credit card payments, savings, emergency funds, etc.
Zero-based budget
This method of planning a budget isn't rocket science, all you have to do is to allocate every single dollar that you earn so that by the end of the month you are left with $0.
Wait, that does not mean you won’t have any penny left with you. It means you must pre-determined the amount of money that you save. For example, you need to make a list of expenses with their amount along with the amount that you wish to save.
If you earn $20,000 a month, then you will make a list like
$20000: Total Income
$8000: Rent
$500: Groceries
$2000: Your wants
$800: Travel expense
$1000: Debts
$700: Car payments
$2000: Emergency funds
$6000: Savings
Remember, the amount mentioned above is referred to for your understanding. You may allocate money as per your income and preferences. As you saw, in the above scenario we began with $20000, and at the end, we are left with $0 which means we have allocated money to all the expenses priorly so that we can save money feasibly.
Cash Envelope
This system enables the concept of visibly seeing where your money is being spent. Let’s have a closer look to understand this concept.
- As we mentioned above, begin with setting a budget or allocating money for categorized expenses. For instance, groceries are $350, entertainment is $450, and more.
- The next includes withdrawing the amount of money you expect to spend in the upcoming month.
- Then divide the cash as per the categorized expense like rent $2000, and $1000 for rent and similarly put the cash separately on each envelope.
- For the entire month’s expenditure pull out the cash from the envelope whenever needed from the categories and when you find yourself out of cash, it means you have spent max for the month.
Reverse Budgeting
In this method, you need to pre-determine the amount of money you want to save and then you will have to balance your entire month’s budget surrounding the saving amount. For instance, instead of listing expenses and saving amount you keep the saving amount aside and then manage your expenses accordingly.
So, with a $15,000 income per month, if you decide to save $3000 then you will have to treat the saving amount as a fixed, non-negotiable amount and then manage your month’s expenses accordingly. In Reverse budgeting, individuals may have to cut out a few expenses or manage smartly to plan a budget around the saving amount.
2. Have a Budget Record on Paper
Once you decide on your preferred budgeting for beginners method then the next step is to have a record of the plan.
Whether you choose to use Google Spreadsheet or note it down on paper, budget pdf template, or other budget online apps (you have multiple options). The highlighting point is to have a complete plan so that you can go back and refer to the budget.
A. Importance of Planning a Budget
While we learned budgeting for beginners, you must be wondering why the budget is so important. And how can help me with my finances? Your concerns are valid. A budget is a perfect tool to help you achieve financial stability even at your lowest and most uncertain times.
When you create a plan, you can track your expenses and simplify the process of paying bills, create an emergency fund, save money for big expenses in the future, save money for unexpected accidents or other medical costs, or plan for your safe and healthy retirement.
In short, a budget helps you walk on a safe financial path and be rest assured of your spending daily and for long-term expenses.
Perks of Budgeting
Everyone emphasizes the importance of budget for healthy money habits. Financial Planning can be difficult, but it can help you achieve financial stability and practice the right cash flow throughout the year.
Still skeptical about planning a budget? We have listed a few perks of creating a budget for your better contemplation.
B. Helps Plan long-term Financial Goals
A budget not only helps you plan your monthly finance but you can aim to achieve your long-term goals via a planned budget. A budget helps you map out your long-term goals, save money and track your funds to achieve your big dreams like buying a house, car, or more.
Assists in avoiding overspending
Many individuals tend to overspend money that they don't even have. As per Credit Bureau TransUnion, the debt for credit cards rose to $5000 by the end of 2022 per household.
In the earlier years, people had control over their spending. At the end of the month after paying all the bills and other expenses, when they had some leftover money only then they considered spending that money on non-essential means. Whereas, today due to credit cards individuals have begun overspending without realizing their bank balance limit or budget which leads them to more debt at the end of the month.
Though, if you follow your budget religiously then, you will tend to have healthy spending habits. With a planned budget, you will have a clear idea of your total income, how much you can save, and how much you can afford to spend per month.
Read More:- A Complete Guide to Building a Strong Financial Foundation
C. Prepares You for Emergencies
In the era of YOLO, you need to remember life is all about unexpected events. And, if you consistently spend your money mindlessly then you may panic when life hits you in some uncertain situations. Whether you are sick, met with an accident, or have other medical emergencies you need to have separate funds for such situations.
Usually, it is advised that emergency funds must have at least 3-6 months' worth of living expenses. These extra funds must be mentioned when you plan a budget. You must plan your budget in a way that doesn’t ruin your emergency funds, other savings for long-term goals, and your routine expenses.
While you may feel motivated and save the money as soon as possible, do not put all your paychecks under emergency funds. Building these funds will take time, that’s why we emphasize more on planning a budget so that you have an idea for future spending.
D. Saving for Retirement Becomes Easy
We know how a budget helps to achieve varied long-term goals. If you stick to your budget, reduce your monthly debts, and save money as per your planned budget, you can have a secured retired life. Yes, you heard it right!
In addition, it is important to add regular savings and investments to your budget. If you keep aside a certain portion of your monthly income and add that 401(k) account, bank deposit, or other accounts, by the time you retire you will have a decent amount of money to enjoy your retirement as you always desired.
Budgeting Tips
We are sure, you must be motivated to save money and plan your ideal budget right away but remember there are certain factors you need to consider before you begin with your plan. We are listing below a few budgeting tips for your understanding.
A. Begin with Most Essential Categories
When you begin planning your budget, it is important to prioritize categorizing expenses that come under your basic needs and basic expenses. For instance, the four walls like food, shelter, utilities, and transportation, once cover these expenses then you can focus on filling the rest categories in your monthly or long-term budget.
B. Every month isn’t the Same
This is one of the crucial budgeting tips that you need to keep in mind. There will be months when you will have to consistently spend for expenses like your child’s school fees, other routines, or car maintenance. Whereas there will be a few months you will want to spend on vacations, or other events.
Make sure you include all the specific expenses on your budget so that you are prepared when all these events come up. Mark the dates of specific events, so that you know when you create a budget.
C. Try to Pay Off Your Other Debts
If you have a pending debt, paying it off must be your top priority.
Get over your debts as soon as possible. Remember, don't pressurize yourself to pay these debts, as you have routine expenses as well. Once you pay off your debt you can focus on planning a budget for the present and future.
Or else, you can consider setting aside a portion of your budget every month to pay your past debts. This will take time to complete your debts, but you won't be tense about your finances when it comes to essential expenses.
D. Miscellaneous expense
Sometimes, there are unexpected expenses that can occur out of the blue. In such a situation, your month's budget can get all messed up. To avoid such situations you can consider setting aside a small portion of money and label it as Miscellaneous expenses.
If in case, the expense under this label keeps popping up frequently then you must make a separate category in your budget.
Read More:- The Beginner’s Guide to Investing in Mutual Funds
Budgeting for Beginners Free - Tools
Some tools simplify the journey of budgeting for beginners free, which means these tools cost 0 dollars and help you plan your budget effectively. You can explore these tools when you create your budget.
- Mint
- GnuCash
- Buddi
- AceMoney Lite
- Budget Spreadsheets (free)
- And more
Bottom line
It’s time to start planning your budget based on methods, steps, and certain tips outlined in this guide. While having a budget beforehand can turn out to be very beneficial, you can try for yourself and thank us later.
When you realize, the purpose of a budget is just not to save money but to have control over your money. That's when you have a chaos-free life and will know exactly where all your money has been spent.
Frequently Asked Questions
To begin with, you can list all of your sources for income then you can track your expenses based on categories like rent, car repairing, Insurance, groceries, entertainment and more. Then, allocate a certain portion of the amount to each category, ensuring you don't exceed the total amount from your income. In addition, you consider certain budget tools to simplify the procedure like spreadsheet or personal finance apps.
While both are equally important for every individual, it is suggested to keep an emergency fund aside for unexpected expenses that can occur in future. Once you have a small emergency fund with you then you can focus on paying off high interest debts like credit card payment and more. Then, you can finally allocate your income with essential expenses, savings and other minimum debts.
Reducing expenses is one of the essential parts of budgeting. You can practice certain steps like observing your non-essential expenses and figuring out where you can cut out the cost. Then you can skip dining out and cook meals at home, look for discounts at subscriptions, use public transportation on a daily basis, and practice smart shopping and more.
