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7 Budgeting Tips for Beginners & Common Mistakes To Avoid

Budgeting Tips for Beginners

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Over 50% of Americans struggle with budgeting, and I used to be one of them. My first attempt was an overwhelming failure.  

After several trials, I realized I had the wrong strategies and the wrong reasons for budgeting. 

Budgeting should be a tool for financial control, not a way to live cheaply or deprive yourself of life’s pleasures. It should be flexible to fit your lifestyle, not restrictive. 

If you feel like your finances are controlling you instead of the other way around, you’ve come to the right place. 

These budgeting tips for beginners will help you handle your finances better without overspending or feeling guilty for giving yourself a treat. 

I’ve tried different budgeting systems, including the Envelope, Zero-Based, and Reverse Budget systems, so rest assured any information in this post is a worthwhile read. 

The Best Budgeting Tips for Beginners 

Whether you want to relieve financial pressure or free up more cash for an emergency fund, a budget that suits your lifestyle is just what you need. 

As you go through these budgeting tips for beginners, remember that a budget is supposed to serve you, not the other way around. The more restrictive it is, the more ineffective it’s likely to be. 

Unsure where and how to start your journey? These budgeting tips for beginners are a great place to start.

1. Set Clear Budget Goals 

Why are you interested in budgeting? It could be because you’re saving up for a trip or want to clear your debts. Or maybe you want to start saving for retirement. 

The first step to setting clear goals is determining the “why”. Budgeting requires dedication and discipline, and you won’t stick to it unless there’s a good reason. 

When it gets overwhelming, remind yourself why you started in the first place. 

Once you determine the reason for budgeting, setting clear financial goals helps you develop concrete strategies and remain focused and motivated. 

How much do you want to save? How much debt are you hoping to cover every month? What’s your time horizon for accomplishing your goal?

I usually determine my financial goals by picturing where I’d like to be in 5 years. I envision how much money the future me has and work backward from there. 

For example, in five years, I want to have cleared my debt, saved a $10,000 emergency fund, and invested a good amount in stocks. This process helps me get the numbers in detail and break my five-year goal into small monthly milestones. 

For instance, I’d need to put aside about $200 monthly to achieve my $10,000 emergency fund target in five years.  

Goal setting is essential, but your goals must be realistic for it to work. Consider your income to avoid setting goals that are beyond your capacity.

2. Choose a Budget Type 

Now that you have your goals well defined, what next? There are several budgeting systems you can employ to reach your goals. 

Trial and error is the best way to determine what works for you. You can even combine two or more methods to optimize results. 

Here are some budgeting systems I’ve tried over the years:

The Envelope System 

The envelope system is a budgeting system that uses envelopes for optimum financial management. 

This is how it works…First, allocate a budget for different categories, say $400 for food, $200 for utility bills, $150 for kids, and $200 for eating out. 

Next, purchase envelopes or hand-make them if you’re crafty, then label each with a category and the allocated sum. 

Once your paycheck arrives, cash out your funds and put the allocated amount in each envelope. 

You must wait for your next paycheck once you run out of money for a specific category. The envelope system helps if you want to be more mindful of your purchases. 

Zero-Based Budget 

I use this budgeting system, and it’s very effective if you constantly spend money to the last dollar. 

The zero-based budget system includes expenses and savings to balance your income to zero. 

Say you make about $3,000 monthly, add up all your monthly expenses such that they add up to $3000. For example:

  • $400 for food
  • $200 for utilities 
  • $900 for rent 
  • $100 for entertainment 
  • $300 for the kids 
  • $800 for savings 
  • $300 for debt repayment 

If you had $3,000 and expenses of $2,000, you’d have $1,000 left over, which may be channeled toward fun spending. 

Including your savings in the expenses ensures that every dollar you earn is used well. This way, there’s little left over for discretionary spending. 

The 50/30/20 Rule 

Not sure the exact amount to allocate toward your expenses? The 50/30/20 rule may work for you. 

This rule splits your income into the following percentages: 

50% for needs like:

  • Rent 
  • Food 
  • Insurance 
  • Transport 
  • Utilities 
  • Child care 

30% towards wants like:

  • Travel 
  • Subscriptions 
  • Dining out 
  • Entertainment 

20% towards savings and debts

This includes building an emergency fund, repaying your credit card loans, and 401(k).

Most people attribute budgeting to strictly spending on basic needs. However, such a restrictive budget is likely to fail. 

The 50/30/20 rule effectively manages your finances while leaving a little wiggle room for fun.

Note that this rule isn’t fixed for everyone. For instance, 50% of your income may not cover all your needs if you live in an expensive city. Feel free to adjust the percentages based on your circumstances. 

The Reverse Budget 

Ever heard of the concept of paying yourself first in budgeting? The reverse budget achieves this by prioritizing savings over expenses. 

Simply calculate your monthly expenses and determine how much you want to save every month. Once you receive your paycheck, deduct your savings before catering to your costs. 

This might be the answer to your problems if you often have difficulty saving money. 

Extra Reading – Investing for Beginners

3. Calculate Your Total After-Tax Income 

You can’t budget successfully if you don’t know how much money you have at your disposal. That said, you must calculate the after-tax income from your day job and side hustles.

Working with after-tax figures is vital for accurately estimating available funds and realistic budgeting. 

Remember to include any additional cash you receive, like child support, government benefits, or alimony. 

Consider using an average or minimum expected income in your budgeting process if your income varies. 

4. List All Your Expenses 

The next step to effective budgeting is knowing where your money goes. Ensure to list everything, even if it takes an insignificant amount. 

Some everyday expenses in an average American household include:

  • Food 
  • Groceries 
  • Rent 
  • Electricity bills 
  • Cable TV 
  • Transport 
  • Dining out 
  • Internet bills
  • Education 
  • Insurance 
  • Debts 

5. Learn How To Differentiate Needs vs Wants in a Budget 

Now that you know what you spend your money on, distinguishing needs and wants is the next step to mindful spending. 

We can’t do without needs like food, housing, and clothing. On the other hand, wants are items that add luxury to our lives. 

Some examples of wants include: 

  • Subscriptions like Netflix and Spotify 
  • Dining out 
  • Home Decor 
  • Gifts 
  • Vacations 

Identifying your wants helps you determine non-essential things you can do without. For instance, you can get rid of subscriptions you no longer use. 

Another example is building a capsule wardrobe instead of spending hundreds of dollars monthly on trending clothes. 

If you’re spending too much money on entertainment like attending concerts or going to the cinema, you can seek alternative hobbies that are more affordable. 

Extra Reading – Hobbies That Make the Most Money

6. Use a Budgeting App To Track Your Finances

I used to track my finances manually with pen and paper, but that was overwhelming after some time.

Using a budgeting app is more convenient, especially if you’re always on the go. Most of us are attached to our phones, so it makes sense to use it in budgeting.

Find out if your bank has an expense-tracking feature. If it doesn’t, other apps like YNAB and PocketGuard seamlessly integrate with your bank to help you visualize your expenses.

Some even let you set small saving accounts for different goals. For instance, you can create a savings goal for retirement and a separate one for emergencies within the same app.

Some budgeting apps have an automatic feature that deducts your savings before you access the rest of the funds for expenses. This is an excellent tool if you often forget to set aside money for saving.

7. Review and Make Adjustments As Needed

As earlier mentioned, a rigid budget is more likely to fail. A successful budget depends on factors like:

  • Income
  • Location 
  • Expenses 
  • Spending habits 
  • Debts 
  • Lifestyle 

Most of these factors may be variable. For instance, if you’re a blogger, your monthly income may not always be standard. 

Even if you have a full-time job, your spending habits may vary depending on lifestyle choices or seasonal bills. For instance, you may not budget for education bills during the holidays. 

Your budget should reflect these changes to the latter for it to be effective. This is why you need to review and make changes often.

I usually work with weekly budgets because my entertainment expenditure varies depending on the hobbies I undertake. 

My expenditure can also vary sometimes because I spend less when I plan my meals and more when I don’t. For these reasons, I find weekly budgets more convenient and flexible.

Common Budgeting Mistakes To Avoid

Are you wondering why your budgeting plan always fails after a week or less? It’s possibly because you’re doing some things wrong.

Here are some common budgeting mistakes to avoid:

Dining Out Frequently 

Everybody loves ordering takeout or visiting their favorite restaurant instead of the tiring process of cooking, right? But this may cause a huge dent in your pocket in the long run. 

Suppose you spend $20 for fast food every lunch break period at work. This translates to $100 for a five-day workweek, $400 monthly, and $4,800 annually. 

And that’s just a simple lunch from a fast-food joint. You’re likely to spend more if you enjoy fine dining often.

Carrying a brown bag to work instead frees up $400 for other expenses like savings, debt repayment, or vacation. 

You must also consider the negative health impact of consuming takeout every day. This may cost you more in the long run if you develop a health condition. 

I’m not saying you shouldn’t dine out. In fact, I enjoy a nice restaurant trip twice a month. Consider cutting back on eating out to maximize your budget.

Not Budgeting for Pleasures 

I enjoy going to the cinemas every time a Marvel movie drops, attending concerts when my favorite artists are in town, and going for swimming excursions now and then.

My first attempts at budgeting failed because I wasn’t leaving room for the things I love. To me, taking control of my finances meant no more concerts, movies, or swimming. 

Every time there was a new event, I ended up spending money that I hadn’t budgeted for and felt guilty afterward. 

Budgeting for such activities in advance has helped me take control of my financial life while still having fun. 

For instance, if there’s a new movie coming up, I’ll estimate the cost of transport, snacks, and movie tickets, then break it down into small bits I can incorporate into my monthly budget. 

I’ve started saving up for the Deadpool movie dropping in July as early as now to avoid last-minute inconveniences. That’s how serious I am about my budgeting life. 

Not Having an Emergency Fund 

Lacking an emergency fund can offset your budget, leaving you vulnerable to financial hardship in unplanned events. 

Imagine budgeting strictly to save up $10,000 toward an initial deposit for an investment only to spend the whole amount on an emergency like an accident.

This will set your financial stability a few steps back. Instead of channeling all your savings toward a goal like retirement, build your savings alongside an emergency fund. 

For instance, if you have an extra $1,000 monthly after expenses, consider channeling $300 toward an emergency fund and the rest to your savings or desired goal. 

This way, your savings remain intact, even on rainy days.

Having a Rigid Budget 

A constrained budget can be overwhelming, especially in financial crises or changes in income and expenses. 

You should review your budget regularly to accommodate important changes. For instance, my blogging income varies monthly. I always review my budgets weekly to accommodate these changes. 

I also update my budget when commodity prices rise due to inflation or drop due to discounts that go on for a month or more.

Beating Yourself Up

So you’ve accidentally impulse-bought the newest trending sneakers, offsetting your budget by about $500. What do you do?

The natural thing to do is feel guilty and wish you could reverse the purchase. You’re only human, after all. But since it’s spilled milk, there’s nothing you can do about it. 

Beating yourself up isn’t the same as holding yourself accountable. The former involves criticizing yourself, which may lower your self-esteem and block your progress. 

Don’t cultivate a cycle of negativity because you failed to adhere to the strict rules of your budget. Try to move on from there and incorporate such expenditures into your budget by saving in advance. 

While budgeting requires discipline and dedication, you shouldn’t expect perfection since no human is perfect. 

Instead of dwelling on that mistake, review your budget, income, and expenses and brainstorm on ways to mitigate such occurrences. 

Overlooking Small Expenses 

Imagine you spend $3 on coffee every day. This amounts to $60 for 20 days, which may seem like an insignificant amount compared to your income.

However, in the long run, this amount accumulates to a significant price since it’s a habitual thing. There’s certainly going to be a few gaps in your budget and expenses. 

That said, consider incorporating small expenses in your budget, especially if they’re likely to build up over time.

Failing To Plan

Benjamin Franklin once said, “Failing to plan is planning to fail.” I’ve turned this into a principle I employ in my day-to-day budgeting. 

Why are you budgeting? What are your goals? You’re unlikely to stick to a budgeting plan if you have no goals to work toward. 

It’ll be overwhelming by the second week, and the best option will be to quit since you’re not doing it for any reason anyway. 

Without clear goals for budgeting, you may underestimate your expenses, leading to pitfalls in your financial stability or accumulation of debts.

When you decide to start budgeting, first to figure out the why and your financial goals to maintain motivation and focus towards the endgame.

Failing To Track Expenses

Tracking expenses and budgeting go hand in hand. There’s no need planning for your money if you don’t know where it’s going. 

If you fail to track your expenses, you may over or underestimate your budget, leading to unforeseen financial implications. 

Imagine allocating $400 for groceries at the beginning of the month while the actual monthly expense is $500. 

You may be forced to take extra trips to the grocery store or resort to lower-quality meals to cover for the underestimation. 

This is why staying up to date with your spending habits is important for successful budgeting. 

Final Thoughts 

Budgeting may seem frustrating, but it shouldn’t always be. Incorporate these budgeting tips for beginners into your strategies to transform your financial life.

Just like learning to play a game or a new language, budgeting requires consistent effort and room for growth. 

If one system doesn’t work for you, feel free to move on to another and another until you find something that aligns with your goals and lifestyle.

Use free budgeting apps or budget binders if you’d rather have someone do the legwork for you. Embrace the challenge and be dedicated to smart budgeting to achieve financial stability.

Lydia is a personal finance expert and the founder of Sproutinue, a personal finance site helping you find legit ways to make money, save money, and achieve financial freedom. She has been featured on various major financial publications, including Investopedia, Business Insider, GoBankingRates, and more.

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