Tips for Starting Your First Budget

You’ve probably heard it dozens of times before, but I’ll say it again…you need a budget and you need to track your spending if you want to be financially responsible and eventually gain your financial independence. What you probably haven’t heard is how to get started with budgeting, so I’ve put together 4 helpful tips below about ways to get started and get your cash flow organized.

Know what you make – This one shouldn’t be difficult. What you bring in after taxes, employer retirement account contributions, and other deductions is your take-home pay amount. If you’re in commissioned sales or some other type of variable pay situation, you’ll need to use conservative estimates of your expected take-home pay to form your budget.

Know what you spend – If you’ve never taken the time to write down what you spend each month, I highly recommend taking some time to go through this exercise. The results can be eye opening. Start by using either paper and pen or an Excel spreadsheet to create two categories of expenses; essential and discretionary. Essential expenses should include things like mortgage or rent payments, insurance, utilities, groceries, gas, and any debt payments like student loans, or car payments. Discretionary expenses include things like recreational travel, cable, subscriptions to apps, concert tickets, dining out, hobbies, etc. If you’re not sure what you’re spending, try going back through a few months of bank statements to add up each category or track your spending for a month before starting your new budget so you know at least approximate values for each category.

Add it all up – Add up all of your expenses for one month and subtract the total from your take-home pay. What did you end up with? If you ended up with a positive number, that’s great! You’re living within your means and can use any excess income to pay down debt or save toward your short or long-term goals. If you came up with a negative number, you’re overspending and likely will end up with consumer debt if you don’t have it already. If this is the case, you’ll need to find some items in your discretionary expenses to cut back on to pay down any existing debts or prevent you from going into debt in the future. If you came up with 0, you’re also living within your means, and that’s great. Make sure if you’re in this category that you’re saving enough toward your short and long-term goals and if not, try to reduce discretionary spending and shift that spending to savings.

Prioritize – One of the things you’ll need to think about if you need to adjust your budget is what’s important to you. If you really like to travel and you really like to spend time dining out with friends, how are you going to balance these two short-term priorities? If you want to pay off debt faster, can you live without cable or limit yourself to one streaming subscription for a while?

Remember, writing down the budget isn’t enough. You’ll need to have some discipline with tracking your spending as well. Otherwise, you’ll never really know where you stand. Make sure to go back and write down your actual expenses in each category each month and adjust as necessary. If you want to make it an easier or more mobile process, consider using an app like Mint, Personal Capital or EveryDollar. No matter how you decide to organize your budget, the basics are always going to be the same – money in, money out, and either a positive or negative number in your bank account at the end of each month.

- Margaret Gooley, CFP®, Worley Erhart-Graves Financial Advisors