Budgeting for beginners: Set Up Your Budget In 7 Simple Steps.
Starting your first budget can be really intimidating. If you are as anxious about beginning to budget as I was, you are probably up late at night watching YouTube videos to find out everything you can on the subject! Having been in the same position, I will tell you exactly what you need to know before you write your first budget.
There is so much information out there about where to begin budgeting. Budgeting for beginners is often a topic that misses an important step and that is the pre budget stuff.
This post will cover what you need to know before you write your first budget:
- What are your money goals
- Your total annual household income
- Your total annual fixed expenses
- Everything else you spend money on annually
- Your total debts and outstanding bills annually
- The amount savings have and the amount valuables own
- If you are living within your means or not
Budgeting for beginners: Set Up Your Budget In 7 Simple Steps.
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1. Set Money Goals
Do you know what you want from your money? I certainly didn’t before I started to budget.
When I was a budgeting beginner I was broke, with €10,000 worth of debt to pay off, as a solo parent. My goal was simple back then. I just wanted to be able to pay enough bills and debt repayments to keep my home ticking over. I was living pay check to pay check and it was exhausting.
Money Goals
I’m so glad I learned about clear measurable money goals in budgeting. It wasn’t until I decided to name my dreams as goals, that I made any headway from a financial perspective. I wrote the following three goals down;
- Pay off €10,000 in debt in one year
- Complete my degree debt free
- Start a business to become self employed
I set these money goals in 2017 and I have achieved them all since then. Before you write your first budget you must get clear on what your goals are. Write them down and don’t hold back. Setting your goals should always be step one when beginning to budget.
2. Total Annual Household Income
When I was a budgeting beginner I did not know what my annual income was. I had an idea roughly speaking, but in reality I didn’t know accurately enough. Think about it. Do you know exactly how much money comes into your household annually? Do you know exactly how much your partner earns? At this stage of pre-budget preparations, it can feel like there are more questions than answers.
This is such an important part of pre-budget planning. It becomes much easier to decide how to use your money when you know exactly what you have coming in each year.
Let’s look at an example:
‘The Jones’s’ make €50,000 per year. Their fixed expenses, including housing, are €30,000 per year. This means everything else that they spend money annually, comes from the remaining €20,000.
The Jones’s know their numbers, so they plan ahead on how they will spend the remaining €20,000 like this:
- They allocate €4000 to savings by setting up a direct debit monthly to their savings account.
- €10,000 is allocated to variable expenses
- €2000 is allocated to a holidays (vacation)
- €1000 is saved especially for Christmas
- €3000 is allocated for miscellaneous and a bumper in their monthly budget
Whatever happens for the rest of the year, the Jones’s know they are covered for all their essentials at least.
3. Total Annual Fixed Expenses
On a simple notebook, start to write down all of the things you must pay for each year. These are a few of the costs included you might include;
- Housing
- Utilities
- Insurances
- Waste management
- Transport
- Education
These fixed expenses may vary a little from year to year. When calculating fixed expenses I include costs that come every year without fail. They are the must haves in my budget.
When I compared that to my income, there was a fairly small difference between the two numbers. This realisation is what made me start my No Spend Year. The numbers don’t lie and once I knew the truth about my money, it was game-on!
Step 4: Everything Else You Spend Money Annually
Variable Expenses
Fixed expenses are the things you, (a) must have to maintain your household, and (b) have chosen to have as fixed expenses whether you need them or not. Variable expenses are pretty much everything else you spend money on outside of fixed expenses. This is how I personally classify my budgeting categories.
This is the time to get out a piece of paper and just write down the things you buy that are not;
- essential living expenses
- debt repayments
- pension or investment contributions
In other words, they are not the fixed expenses that you have identified as needing or deemed as important.
Don’t worry about the amount of money you spend on each of these things yet but here are some examples of what might be in your variable expenses category.
- Food and drinks from takeaways and restaurants
- Taxis
- Clothes and shoes
- Makeup and accessories
- Movies and other activities
- Subscriptions
- A burst pipe
- Tyres
- A toaster
You get the picture, just list all the potential things you spend money on in a year. I found it really helpful to take out my calendar and go week by week through the year. It jogged my memory about special occasions, family events, holidays, school breaks and all of the other times when I spend money through the year.
This Step Takes Time And Complete Honestly With Yourself.
I spent a long time and got really detailed on this step. The other steps have a solid record that is easily available in the form of payslips, online banking, bill statements and others statements. This ‘everything else’ section is so very personal and not necessarily on record in such a clear way.
These are my tips to help to overcome that challenge;
- Go through 6 months of back statements with highlighters and add up the spending that is not debt repayments, fixed expenses or other other essential costs.
- Look around each room of your house and make a list of the things you bought in the last 12 months
- Go through your camera roll on your phone to jog your memory about holiday expenses and similar events.
5. Total Debts and Outstanding Bills
Debt is money owed to any person or institution for any amount and for any reason. You might have been tempted to count your debts and outstanding bills in the other steps but I recommend that you count these in a separate category of their own. I also recommend that you go through this process in the order laid out. If you are a budgeting beginner this will allow you to see things a bit more clearly.
Why Does The Order In Which You do These Steps Matter?
Looking at your total debt repayments side by side with your ‘Everything Else’ number can make for pretty stark reading. You can now see clearly that after you pay for all your essentials, the remaining money you have in your household income, may be stretched too far.
Can you afford these debts?
Can you even afford all the items in the ‘Everything Else’ category?
And that’s the kicker. Fixed expenses, income and debt repayments are pretty much fixed in the short term. The ‘Everything else’ section is the first step to making cut backs as its the only area most people can immediately adjust themselves.
This process step made me realise that my borrowing was bordering on reckless. I didn’t borrow any of that money lightly. I was in need of most of the things I bought but now I was in a mess. So now the things that went into my Everything Else section were up for serious review. I began to cut my ‘everything else’ spending right back and directed that money towards paying off debt instead.
6. Savings, Valuables And Possessions
Now that you know where you stand with your money day to day, do you know how much you have in savings? Do you own things of value that could be sold. If you are a budgeting beginner, the idea of selling something you own may not be up for discussion. That is ok! You decide whether that is an option for you or not. If you have savings, maybe you will decide to use some of that towards debt. Again, only you know if that is appropriate for your household.
Writing all of these things down brings an awareness of your relationship with money. It helps to reveal the balance of income and expenditure in all its forms in your life. That is all that matters really, your awareness to your own relationship to money and how that is serving you and your family. Selling items that are no longer being used and reallocating savings are a great way to make progress on debts.
7. Where Do You Stand: Are You Living Within Your Means?
What is the bottom line. Are you spending more than your income each year or are you spending less? Are you living below your means, just within your means or above your means. These numbers that you have gathered will help you to make a solid plan for the next year of your life. Monthly budgets can be derived from these numbers, but if you begin your budgeting journey like this, you’ll be rock solid!
