8 Tips for Starting a Budget

You’ve decided keeping a budget is a good idea, but how do you go about starting a budget? I went through a similar experience in 2014 as a travel nurse when I decided to sit down and figure out how to create a budget for myself.

There are lots of ways to go about starting a budget. I’m going to talk about the way that I know best and the process I went through. You can decide what works well for you. The important point is to figure out the best way for you. I used and still use YNAB or You Need A Budget. I have an old version of YNAB which is pretty different from the new YNAB, but a lot of my budgeting ideas have come from the old YNAB rules.

1. Decide on what budget app you’re going to use.

I use YNAB 4 which is unfortunately no longer available. I really tried about a year ago to transition to the current version of YNAB but it feels so different. Most budgeting apps are now cloud based meaning you need a web connection to make them work. There’s a ton of different apps out there, but I’ll post a couple of suggestions in no particular order for starting a budget:

  • Tiller is probably my first choice if I had to give up my old YNAB 4. Tiller is a reasonably priced Google Spreadsheet budget app. A free version available if you don’t mind importing everything manually.
  • EveryDollar is Dave Ramsey’s budgeting app. I tried the free version, and it was fine. The premium version is quite pricey, but many use the free app without difficulty starting a budget.
  • YNAB is still an awesome budgeting app although quite different from the version I use.
  • Mint is the more popular free budgeting app. I used it in the past, but my budgeting habits didn’t stick for some reason. Be aware that Mint is free because they basically mine your financial data for profit. If that’s okay, then Mint is probably now a great option starting a budget.

2. Create budget categories.

Budget categories should be helpful for your lifestyle. I have several main categories with multiple subcategories. My main categories are Giving, Everyday Expenses, Yearly Expenses, Rainy Day Funds, Savings Goals, Debt, and Misc.

Another good main category list could be Everyday, Periodic, Yearly, Debt, and Savings. Most of my subcategories are under Everyday Expenses and Yearly Expenses.

Figure out what works for you, but I recommended 3-7 main categories with multiple subcategories when starting a budget. You can probably get away with just multiple main categories depending on how closely you want to track your spending habits.

3. Track your spending.

Import the last several months of financial data into your budget app when starting a budget. This will help you see where your money naturally goes with your current spending habits. Track your spending throughout the month and try to match each transaction with your budget categories.

4. Calculate your monthly income.

Figure out from your bank account records or pay stubs how much money you’re actually making each month after taxes. This is important starting a budget, so you know how much money you have to actually budget each month.

5. Figure out your current debt.

Include student loans, mortgages, credit cards, car loans, and everything that you owe money on and are supposed to pay money back when starting a budget. Figure out how much your payment is for each debt and subcategorize this under your Debt category in your budget.

6. Live off last month’s income

If possible, try to create your budget from last month’s income. If you bring home $4000 total for the month of May, then set a $4000 budget for June. This can be hard at first, but break the paycheck to paycheck cycle. Creating a budget does not mean you spend all your budget. Savings should be a large part of your budget and hopefully a main budget category.

7. Assign money incrementally to each subcategory in your budget.

This is the fun part of starting a budget and the actual action of budgeting! Start with the important subcategories and then put leftover money in the nonessential subcategories. This is called zero-sum budgeting where every dollar gets assigned. For example, my rent, car insurance, utilities, and groceries are some of my essential subcategories. Coffee, Eating Out, and Gardening are some of my nonessential subcategories. Don’t feel bad if every subcategory doesn’t get money. Budgeting is all about making compromises and figuring out what is most important in your life.

8. Adjust the money in your budget throughout the month.

Budgets aren’t fixed in stone after starting a budget. Life is usually unpredictable and so often is our spending. This is normal and okay. Adjust your budget by moving money around in your subcategories throughout the month.

For example, I budgeted $50 for gifts in May but bought an $80 gift for my friend’s wedding in May. I’m now short $30 in my Gifts subcategory. I didn’t go out to eat much in May because of the quarantine but budgeted $200 for Eating Out. I just move $30 from Eating Out to Gifts. I still have $170 for Eating Out.

Budgets are more like targets that help you aim at a specific goal rather than something rigid and inflexible. Ideally you put the exact amount in each subcategory but this NEVER happens. I often have money left over in some of my budget categories each month while deficits in other categories. If I’m consistently over budget in a specific category then maybe I need to increase the month amount that I’m budgeting in that category. I try to pad my categories so I end up with just a little bit of money leftover in each category.

The main key is to avoid spending more than you earn each month. Occasionally this happens due to a large unexpected expense or event. This is why you need to have an emergency fund which provides a cushion for months with big spending. Generally though you should be saving each month as part of your budget categories and rarely overspend more than your earn each month.

Budgeting = Freedom!

A budget works great as a tool to help you prioritize how you’re going to use your money. Budgeting doesn’t have to be constricting. Rather keeping a budget should be freeing as you now know where all your money comes and goes. You decided how to spend it.

My wife enjoys going to the theater so it is a budget category that we include. Both of us have a budget category called Fun Money. This is money we both get each month to spend on ourselves in any way we want. We are free to choose how we use the money we make each month.

Budgeting helps you live within your means and avoid overspending. Keeping a budget helps us live the life we want while achieving our financial goals. Happy budgeting!