How to Budget: Steps to make your first money plan

Learning how to budget is the most critical step you will take to get your financial life together. And yes, merely muttering the word budget can feel a little scary. All new things are a bit terrifying at first. 

I was uneasy the first time I rode a bike, had my first kiss, or started as a new grad nurse. Trying new things is scary, and that’s okay.

When I finally made my budget — After failing time and time again for years — I approached the process with a little fear and a ton of conviction. 

You will learn a few things

  • It becomes more comfortable with practice and time
  • Budgeting is fun (yes, really!)
  • With a little practice, you can become a budgeting ninja

Breaking the paycheck to paycheck cycle, having money in the bank, and paying off your debt is nothing short of magical.

I’m sure you’re worried that a budget will restrict your spending and is the equivalent of the fun police. Still, I’m here to tell you it can also be fun to budget, and nothing is as exciting as celebrating a financial win. Telling your money where to go and following through with your plan is incredibly empowering. 

So how do you get to this place of financial enlightenment? I’ll teach you how to start in a few short steps. You’ll find in no time that a little dedication to your finances results in a big payday for you. 

Creating a budget of your own

  • Makes you feel like you got a raise
  • Helps refine your values
  • Sets the good kind of limits
  • Allows you to enjoy spending money worry free

What is a budget?

A budget is a plan for your money. It can be a plan you make for the month or for each paycheck. My favorite type is a zero-based budget, that’s where you give every dollar you earn a job. When every dollar has a job, financial goals can be attained at incredible levels.

Not too long ago, I started a zero-based budget with the initial goal to increase my cash flow. With a little bit of practice (and a lot of overtime), I paid off $46,000 in student loans in 16 months. It’s kind of insane to think about it now, and it wouldn’t have been possible without a plan. 

How to Budget– Track your expenses

Do not pass go! This step is incredibly important to the process and often skipped over. Tracking your expenses helps you understand your spending patterns.

Up until now, you’ve been on autopilot, swiping plastic (it’s fantastic, NOT), being hit with dopamine, and then crashing down when you see your credit card statement. Am I right?

There are two ways to track your expenses

  1. Review and categorize your bank and credit card statements
  2. Start where you are now and write down every purchase you make (I prefer this method)

Review and categorize your bank and credit card statements 

This is a great way to get a rapid understanding of your spending from the past 2 weeks to several months. But it can also feel very overwhelming, and you may feel guilt looking at your recent spending. It’s okay to let the past be the past. 

If you know looking at your past purchases will send you in a tailspin, start with method number two. 

Tracking your current expenses

Becoming aware of what you are currently doing with your cash kicks you out of that robot autopilot zone and gives you the ability to choose. Maybe you will realize before swiping your card that something is a want and not a need. That’s the power of tracking your spending.

To get started, simply keep a small notebook with you. Every time you spend money, make an entry in your notebook. List the date, what you spent your money on, and how much you spent.

It’s that simple. Don’t worry about changing your habits at this point, you are becoming aware of your spending patterns and practices. Try to imagine yourself as a scientific observer writing field notes. 

Naturally, when you track something, you become more aware of what you are doing and will most likely start to make better choices. That’s a fantastic benefit of the process, keep it up!

How to Budget — Available funds (income)

A successful budget hinges on knowing how much money you can spend. Your available funds are your income. It’s also important to know how much and how often you get paid. This information will go to the top of your money plan. 

How to Budget — Fixed expenses

You have recurring expenses in your life. These are predictable; they most likely occur monthly, on the same date, and for the same amount. 

Fixed expenses include

  • Rent/mortgage
  • Utilities
  • Car/Renters insurance
  • Cell phone 
  • Streaming subscriptions
  • Gym memberships
  • Car payment
  • Student loans
  • Credit card bills
  • Internet

Hunt down everything you pay monthly and write down what it is, how much it costs, and when it’s due. These expenses are likely non-negotiable, meaning you can’t decide to skip a month, and you can depend on this section of your budget remaining stable. I won’t lie, the fixed expenses section is the easy part. 

How to budget — Variable expenses

I like to think of variable expenses as all the stuff that makes life fun. This section encompasses all those YOLO moments, except you will plan for them now — trust me, they are more fun when you know how you will pay for them!

Variable expenses include

  • Restaurants
  • Clothing
  • Travel
  • Gas
  • Groceries
  • Beauty (Hair, skincare, etc..)
  • Fun Money — this category will change your life!
  • Gifts 
  • Savings

Think for a moment, what’s one area you know you spend too much money? Giving dollar amounts to how much you can spend in each area creates the good kind of boundaries. When you follow your plan, you will become more discerning with where you spend your money, and that will increase your satisfaction when you do choose to spend money. 

The eye-opening part here is that you can only spend as much money on the variable stuff that is left over after your fixed expenses are covered. So take your income and subtract the number of your fixed costs, and now you have what’s available for this section. 

Set spending limits for your variable categories

Unlike your fixed expenses, where you’ve been told how much they cost, you get to decide how much you will spend in each variable category.

Look back at your expense tracker and set realistic amounts for each category. I’m serious, be realistic, not what you consider ideal. If you spent $300 at restaurants last month, saying you’ll only $50 this month is likely setting yourself up for failure.

Try setting a reasonable amount but a slight stretch, say $150 for restaurants, and know that as you practice, you’ll become better at this. 

Don’t worry if you mess things up a little in the beginning, it can take several months before you feel confident appropriately allocating funds to variable expenses. The important thing is to know you aren’t failing, you’re learning, as long as you stay committed, you will succeed. 

How to Budget — Your complete zero-based budget

When you are finished setting up your income, fixed, and variable expenses, you will have created your budget.

Make sure the total amount budgeted equals your income. If these numbers are off (they usually are in the beginning) you’ll likely need to reduce the limits of your variable categories. The easiest place I’ve found to cut money immediately is what you spend while at work.

Now it’s time to implement this impressive financial blueprint you’ve created. 

You should set aside a time every day to update your expense tracker and the available fund amounts left in your various categories. Remember to keep that notebook (or however you were tracking your daily expenses) with you so you can transfer them to your budget when you get home. Before you make a purchase, check-in with how much you have available to spend and make sure a potential investment is on plan. 

In the beginning, it will be hard, you’ll fumble, and you might feel like everything revolves around tracking your purchases. Truthfully, you will put a lot of effort into this. And then little by little, it’ll get easier. In time you’ll look forward to checking in with your budget, goals, and accounts. 

2 thoughts on “How to Budget: Steps to make your first money plan”

  1. Wendy Atkinson

    Great article with practical and realistic ideas. I agree that writing down our variable expenses does make us think twice about making those (usually completely unnecessary) purchases!!

    I am in the UK and I just looked at your website today after listening to you on the Frugal Friends podcast. So far it’s great!

  2. Hi Wendy! Thanks for leaving my site some love. I’m excited you found me through Frugal Friends, it was really fun recording with them.

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