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“Where did my money go?” Have you ever asked yourself this question in the middle of the month and you were unable to tell what you spent money on? You’re not alone. Happened to all of us. But there is a simple way to always know where your money disappeared to: a budget.
Let me guide you step by step on how to create your first budget. You’ll find out what to focus on, what to include, and how to make the budget work for you. Let’s dive in.
What Is a Budget?
A budget is a plan for your money. It tracks your income and your expenses helping you manage them more effectively. Once you make a plan, it takes so much of the brain work out of spending. Anything you want to buy, you just ask yourself “Have I included this expense in the budget?” If not, skip it. This is such a simple way to reduce overspending and impulse buys. It helps with reducing financial stress of not knowing how much money you have, avoiding debt, and reaching your savings goals.
Don’t let anyone convince you that when you’re budgeting you can’t buy anything nice for yourself or that budgeting is only for people with financial problems! These are simply not true. Noone is stopping you from budgeting in treating yourself to a nice meal, just keep it to your budget. Also everyone should budget. How else are you to know what you spent your money on?
So how do I start to make this plan and make it happen? There are fancy mobile and web apps or other online tools that can help you with that (I will discuss them at the end of this blog post) but pen and paper will be more than enough to start. So grab a piece of paper and a pen, and let’s get to work.
Types of Budgets
There are plenty of budget types available so you can find one that is most suitable for you. To start with, here are three most common budget types:
50/30/20
A budget where you allocate 50% of funds to needs, 30% to wants, and 20% to savings or debt repayment.
Zero-Based Budget
Every dollar is accounted for and assigned a category. Every dollar has a role to play.
Envelope System
When you spend too much when using a debit or credit card, go back to cash. Each envelope is a different category and the appropriate amount of cash is in each one. Then you can only spend the cash that is available in the envelope.
Step-by-Step Guide to Creating Your First Budget
Step 1: Assess Your Income
Write down all of your income streams. Make sure to include ALL of them: salary, wages, side hustles, freelance work, investment income, etc. Note if the income is before or after tax.
Once you have them all, sum up the after tax income as that is the income you actually have in your hand and can allocate.
Step 2: Track Your Expenses
Write down everything you spent money on in the last month. This will give you an overview of what you need to spend money on, e.g. rent or gas, and how to allocate funds so that all the necessary expenses are covered, there is room for fun, and savings or debt payments are taken care of.
It’s helpful to divide expenses into fixed expenses, such as rent or loans, which are consistent each month, and variable expenses, such as groceries or entertainment, which vary each month.
Step 3: Set Financial Goals
A good practice before starting your budget is to set financial goals for yourself. However, when first starting out, you don’t make them too complicated and don’t let setting the goals prevent you from starting to budget! They can be as simple as “Save $1 each day this month” or “Grow my emergency fund $150 this month.” Even if right now you don’t know what your financial goals are, that’s ok. Just track your income and spending, and your financial goals will make themself clear more quickly than you might think.
Step 4: Create Your Budget Categories
Now that you know what you spend money on each month, name your budget categories. I think it’s important to make your budget categories meaningful to you. If you had the time to read my blog post Discover Your Core Values: The Secret to Better Money Choices and do the exercise, it would be even better to use your core values as budget categories. It’s absolutely ok to use the common categories, such as housing or food & drink, but the more personalized the categories, the easier it will be for you to stick to them.
Step 5: Allocate Funds
The next step is to allocate your money to the budget categories. This is where the plan comes together: you know how much you earn, you know what you need to spend money on, and you distribute the money accordingly, setting some aside for financial goals. Now whenever you want to buy something, you check with your budget if that expense is accounted for. How easy is this?
Step 6: Monitor and Adjust Regularly
A budget is not set in stone. You need to monitor it and adjust it regularly. You might need to adjust some of the allocations to make sure you stay within budget, e.g. cut some subscriptions. Also your life situation might change, e.g. you have a new baby, and your budget needs to accommodate the change.
I like to review my budget at least weekly as I’m always interested in where my money went, how I am doing with regards to spending, and if my savings are growing at the rate I chose for them. I suggest you also make time weekly, bi-weekly, or at least monthly, at a regular time, to review your budget, track progress, and make adjustments if necessary.
Tips for Sticking to Your Budget
Sticking to a new habit, and creating and monitoring a budget is definitely a new habit, can be hard. So here are some tips to make the process as easy for you as possible:
1. Automate Savings and Bills
Having one less thing on your mind to worry about is very helpful. Check with your bank if you can automate payments to your savings account every time you receive your salary, or for bills whenever they are due.
2. Use Cash or Envelope System
If you can’t control your spending when using debit or credit cards, go back to the basics: use cash. When shopping, make sure you only have the allocated cash with you and no more. That way you can’t spend more than you have.
3. Plan for Fun
Remember: budgeting is not depriving. You still want to live your life and have fun. Make sure you allocate money for entertainment or treats, just within reason, so that your other categories won’t suffer.
Tools and Resources to Help You Budget
Pen and paper are a great way to start. But when you start getting the hang of budgeting you might need tools that offer more functionalities, e.g. charts or detailed analysis of your spending habits. You might want to look into:
- Google sheet spreadsheets: Free and customizable
- Mint: Tracks spending and offers insights
- YNAB (You Need A Budget): Helps you give every dollar a job
- EveryDollar: A simple tool to track expenses and plan your budget
Budgeting is one of the most empowering habits you can develop. It’s not about being perfect – it’s about progress. Start small, stay consistent, and remember to celebrate your wins along the way.
If you’ve been asking yourself, “Where did my money go?” this is your chance to take charge. Grab a pen, open a spreadsheet, or try out an app, and start today.
You’ve got this – and trust me, your future self will thank you.
Let me know how your budget creation is going in the comments below. Or maybe you’re already budgeting like a pro and would like to share some tips with the rest of us? Don’t hesitate! Comment below.
Disclaimer: I am not a financial advisor, and the content on this blog is for informational purposes only. Investing carries risk, so it’s important to do your own research before making any financial decisions. The information shared on this blog is not intended to be financial advice or a suggestion to invest in any particular asset or strategy. For personalized advice, please speak with a licensed financial professional who can assess your unique situation and goals. Ultimately, all investment decisions are your responsibility.
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