How to Create a Budget as a Beginner

By MicaR | Online Venture | 31 May 2024

Making a budget means you are managing your income and expenses. Making a budget also means planning your expenses based on your income. For example, if your income is $1000, you will be planning your expenses in a way that does not exceed your income, if your income is $2000, your budget will match that income level. When you make a budget, you will know where you should spend, and how much should you spend; you will not only spend wisely but will also be able to save money for emergencies, start investing, or even have money to spend on luxuries like going for a vacation, buying an expensive gadget, etc.

The Rule of 50/30/20 in Budgeting

The government makes the budget so that it can make appropriate spending according to its income. Businesses and companies make budgets so that they can allot an appropriate amount for business development, product result, marketing, etc. Likewise, every household also needs to make a budget so that they can manage their finances. While businesses and governments make a yearly budget, individuals should make a monthly budget. Making a monthly budget will help individuals and families manage their money properly.

When you are making a family budget, you will have to follow the rule of 50/30/20.

You should divide your expenses into three categories,

Essentials: This category should include everything that is essential to maintain your life, for example, food, rent, credit card bill, fuel, internet, electricity, etc.

Wants: This category should include your expenses such as traveling, dining out, movies, subscription services, new clothes, etc.

Saving/Investing: How much do you want to save or invest every month?

The rule of 50/30/20 says you need to limit 50 percent of your income on essentials, 30 percent on wants, and 20 percent on your savings and investment.

Your expenses should not exceed your budget, for example, if your budget for essentials crosses 50 percent, you will have to cut your expenses.

How to Create a Budget as a Beginner

If you have never created a personal budget, here are a few tips that will help you with creating your monthly budget.

Set your primary goal: Why do you want to create a budget? Do you want to create a budget so that you are able to manage your cash flow properly? Do you want to create a budget in order to save money for your investment funds or retirement funds, or emergency funds? You need to be very specific with your goal and try to stick to your goal.

Create a budget: Once you know why you want to create a budget, the second step is to create a budget. Your budget should include two things, income, and expenses. You need to list your all income sources and all expenses. You need to categorize your expenses into different categories such as rents, food, saving, emergency funds, investment funds, real estate funds, etc. depending on your goal.

Try different budgeting techniques: The one that works for me might not work for you. Therefore, you will have to try different techniques until you stumble upon a budgeting method that works best for you. You need to understand one important thing though. Budgeting does not mean living in scarcity. Budgeting means managing your money properly, knowing where and when you should spend, and when and how you should save or invest.  

How to Stay Within Your Budget

The general rule of the budget is to make a budget and stay within your budget. Let's say, you allotted $200 for fun and entertainment, if you used your entire budget in the first week, you will have to avoid spending on any entertainment-related activities for the rest of the month. If you have allotted 20 percent of your income into saving accounts, you should stay with this plan no matter how difficult you might have if you saved 20 percent of your income. Therefore, you should always make a realistic budget and your budget should try to cut unnecessary spending.

When you are on a tight budget, the first thing you need to do is reduce your expenses. Reducing expenses means not just cutting your unnecessary expenses like sodas, movies, chocolates, coffees, etc. but even cutting spending on essentials. For instance, do you really need a large living space, why not move to a smaller house to save money? Do you really need to eat meat every day? Why not switch to cheaper alternatives like plant-based food? Do you really need a car when you are on a tight budget? Why not use public transport and save money? There are numerous methods.

How to Make a Budget For Beginners

When you are making a budget, you need to follow the 50/30/20 rule. This rule implies that you allocate 50 percent of your income to your essentials, and never exceed 50 percent of your income for your essential expenses. You also need to save 20 percent of your income, no matter what you need to save at least 20 percent of your income. You need to allot 30 percent of your income for your wants and wishes. This includes vacations, buying luxury items, etc. If 30 percent of your income does not get you there, you need to continue to save 30 percent for many months until you can finance your holiday travel.

The Rule of Making a Budget

 The first rule is to make a realistic budget. A realistic budget means a budget you can actually stick to it. Let's say in your budget you set 30 percent monthly savings, if you are not earning much this will be over-ambitious and you will not be able to stay within your budget. If you allot 5 percent of your income to entertainment, you should start within that budget, and never exceed your entertainment budget. You should make a budget for every kind of expenditure and you need to cut your non-essential expenses. That’s how you will be able to stay within your budget.

The second rule of a budget is controlling your expenses.

I don't think anyone should have a difficulty in answering a simple question like "how much money should I spend?" If you know the rule of 50/30/20 in personal budgeting, you should be able to answer this question. The rule of 50/30/20 says that you should spend only 50 percent of your income on necessities, you should save 30 percent of your income on fun/enjoyment/luxuries, and save 20 percent of your income on emergency funds and investment funds. The rule says your spending should never be more than 80 percent of your income and the 80 percent spending should cover everything from your rent, food, loan repayments, credit card bills, health care expenses, buying new clothes, going to movies, etc. The rule of spending 50 percent on necessities and 30 percent on luxuries is the maximum you can spend on these categories. If you can keep your expenses lower, and add more to your savings on investment funds or emergency funds, that would be better.

 How to Make a Budget For Beginners

If you have never made your personal budget, here are tips to help you get started:

Project your monthly income: In your income category, you should include every penny you are expecting to receive in the given month, for example, your salary, stock dividends, rental income, income from a side hustle, etc. 

The Rule of 50/30/20: In your expenses category, you need to follow the rule of 50/30/20. This rule implies that you allot 50 percent of your income to essential spending, 30 percent to your wants and wishes (buying gadgets, going on a vacation, etc.), and 20 percent of your income to saving. You can allot more money for your savings if you earn better.

Stay within your budget: The whole point of making a budget is you should be staying within your budget. Staying within your budget means you never go above your budget. You don’t spend more money than you have set for a given category.

Cut your expenses: When making a new budget plan, take reference from the pervious budget plan and try to see where you can cut your expenses. In order to cut your expenses, you need to differentiate between essentials and nonessentials. You might even have to downsize your lifestyle to cut expenses.

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