How to Make Your First Budget

Before you make your first budget, you have to know what a budget is. Think of it like drawing a car – you have to know the concept first. A budget is a plan that outlines your income and expenses, giving you control over your money and helping you reach your financial goals. It’s the tool that you can use to tell your money where to go. But if you’ve never made a budget before, the idea might seem daunting. Just kidding, it’s absolutely terrifying. Don’t worry though, with some guidance and patience, you can make a budget that works for you. In this post, we’ll break down the process of making a budget into manageable steps. By the end, you’ll have a better understanding of your finances and a plan to improve them. To help out, check out our free Budget Tool.

Understand Your Income and Expenses

The first step to creating a budget is understanding your income and expenses. Your income is the money you earn, such as your salary or wages. Your expenses are the money you spend, such as rent, groceries, and entertainment. To start, gather all your financial documents, such as pay stubs, bills, and bank statements – doing so will make the rest easier (don’t worry if you don’t have these, we’ll discuss that later).

Next, make a list of all your income sources, the date they’ll hit the month, and their amounts. Then, make a list of all your expenses, the date they’ll be paid this month, and their amounts. You might want to divide your expenses into categories such as housing, transportation, food, and entertainment. Be sure to include both fixed expenses (such as rent, which stay the same each month) and variable expenses (such as groceries, which can fluctuate). Once you have a clear picture of your income and expenses, you can move on to the next step.

Stuck on groceries and dining out? That’s normal, so keep calm and keep pressing on. Look at your bank statement and see how much you’ve spend on groceries – those go on the grocery budget. If your groceries are too high, think about the extras you recently purchased or the generic brands you can tolerate and see if you can save some money.

Dining out belongs in the Recreation category, not the grocery category. You don’t need a restaurant to live. Having somebody else cook your food and do your dishes is just as much a luxury as hiring a maid, so we list it as Recreation since most restaurant choices are about the Experience. If you have a Bad Experience, you don’t usually return to the restaurant. Why? Because you weren’t properly entertained to justify the cost. Entertainment = Recreation.

Now that you have your income and expenses outlined, you might be feeling overwhelmed. You might be surprised by how much you’re spending on certain things, or you might be worried that you don’t make enough money. Don’t panic; this is normal. The important thing is that you’re taking the first step towards financial awareness. With this information, you can move on to the next step, which is creating a spending plan. But before we go there, let’s discuss how to do your first budget without the documents (like, if you’re moving out of your parent’s house).

Expecting Expenses After Flying the Coop for the First Time

Now this next section is for those who are leaving your childhood home for the first time. Sure, you feel comfortable with your income, but how do you calculate expenses you haven’t experienced yet? That question causes anxiety for most Americans, but never fear, you just have to do some research.

You should have an idea about how much rent is. So that’s not hard and it’s hopefully your largest expense. You need to look at your new rental agreement and see if utilities are included. Now, pick up the phone and call your new landlord or knock on the door of your neighbors and simply ask: How much can I expect the electric to be? How much can I expect the water bill to be? If all else fails, set aside 10% of your net income for this. Remember, net is your paycheck after taxes.

Things like your internet and cell phone can be really easy to figure out. Go online to your preferred company – the prices are usually listed right there. Beware though, many big name providers have hidden fees. We recommend you go with secondary providers for the first 6 months while you get your feet under you, because they don’t typically have contracts or hidden fees, so you can easily adjust once you’re comfortable with your budget.

 The big monster is groceries. But shine a flashlight on this beast and it’s not so terrifying. The flashlight will take some work though, so put on your big boy/girl pants. You should first meal prep two weeks. Calculate what all you will need and don’t forget things like salt and cooking spray. Make sure you write down all the ingredients you’ll need to cook breakfast, lunch, dinner, and the snacks. When you do this, you’ll see that many recipes make more than what you can eat – that’s great! Leftovers will save you a ton of money and are healthier than fast food. OK, now write down a meal plan, a grocery list, for Week 3 and Week 4. You’ll see that you’ll need some new ingredients, and you’ll need to restock, but you’ll also already have things like salt and pepper. Take both lists to the grocery store and do some window shopping. You’re first list will likely be higher than the second, and the second will be much closer to what you need to budget for weekly.

Create a Spending Plan

A spending plan, also known as a budget, is a plan that outlines how you will allocate your income towards your expenses. It gives every dollar a job. Jobless dollars burn holes in wallets. The goal of a spending plan is to make sure that your income covers your expenses and leaves you with some money left over for savings and getting out of debt. To create a spending plan, start by prioritizing your expenses. Which expenses are necessities, and which are luxuries? For example, housing, food, and transportation are necessities, while entertainment and dining out might be luxuries. Next, allocate your income towards your necessities first, making sure that you have enough to cover them. Then, allocate any leftover income towards your luxuries. Finally, make sure that you’re setting aside some money for savings or debt repayment. This might be a small amount at first, but it’s important to get into the habit of saving or paying off debt.

We recommend using three tiers for categories: Primary, Secondary, and Tertiary. The most important is Priority which has the most important categories. Secondary categories are also important, but not as important as the Priorities. And Tertiary Categories are important to you, but are the first to be cut out when the budget gets tight. Here’s what it looks like:

1. Priority Categories
   • Date Night
   • Food & Groceries
   • Mortgage/Rent
   • Toiletries/Cosmetics
   • Transportation
   • Utilities
2. Secondary Categories
   • Childcare
   • Health
   • Home Expenses
   • Insurance
   • Miscellaneous (the catch all and bottom line – important)
   • Pet Expenses
   • Sinking Fund
   • Taxes
3. Tertiary Categories
   • Work Expense
   • Cash Withdrawals
   • Christmas Fund
   • Computer/Electronics
   • Education
   • Gifts
   • Investments (non-retirement)
   • Recreation
   • Vacation Savings

Creating a spending plan might require some trial and error. You might realize that you need to cut back on certain expenses or find ways to increase your income. Don’t get discouraged if your spending plan doesn’t work perfectly at first. The important thing is that you’re making an effort to improve your financial situation. Keep track of your spending and adjust your plan as needed.

By the way, our free Budget Tool can do this categorizing thing for you.

Stick to Your Budget

Now that you have a spending plan, it’s important to stick to it. This can be difficult at first, especially if you’re used to overspending or living paycheck to paycheck. But with some discipline and determination, you can make it work. Here are some tips for sticking to your budget:

• Track your spending: Keep track of your spending as you go. This will help you stay aware of where your money is going and make adjustments if necessary. We recommend using our Budget Tool, EveryDollar by Ramsey Solutions, or MoneySpire.
• Avoid impulse purchases: Try to avoid making impulse purchases. Before buying something, ask yourself if it’s a necessity or a luxury, wait 48 hours, and only buy on a full stomach with a debit card (you will spend more if you use a credit card).
• Find ways to save: Look for ways to save money on your expenses. For example, you might be able to save on groceries by buying in bulk or using coupons. There are many free refund apps out there where all you have to do is scan your receipt and earn redeemable coupons. We save hundreds a year with these!
• Stay motivated: Remember why you’re budgeting in the first place. Whether it’s to save for a down payment on a house, pay off debt, or build wealth – keep your goals in mind to stay motivated.
• Sticking to your budget might require some sacrifice at first, but it’s worth it in the long run. By taking control of your finances, you’ll be able to reduce stress, save money, and work towards your financial goals.

Making a budget might seem overwhelming at first, but with some guidance and patience, anyone can do it. By understanding your income and expenses, creating a spending plan, and sticking to your budget, you’ll be on the path to financial stability. Remember that budgeting is a process, and it might take some time to get it right. Don’t give up if your first attempts don’t work perfectly. Keep trying, and you’ll eventually find a budget that works for you. We’ll be happy to help you if it gets too stressful. Sign up for one of our Coaching Sessions for just $20 and get some expert advise and peace.

*$20 Coaching Session price as of 2023 June 10