5 Budgeting Tips for Beginners
A goal of mine this year is to seriously increase my savings. Honestly speaking, beginning my journey towards financial freedom has consisted of tripping, falling, and pressing the reset button — a few times. Although frustrating, I figured what better way to attack my plan towards saving than to start at the top of the year with a freshly, fine-tuned budget.
If you’re anything like myself and didn’t grow up with the best relationship with money, this topic can be a bit intimidating causing you to feel apprehensive. While understandable, the best reaction to have in this situation is by committing to educating yourself as opposed to shying away from the topic and resuming normal spending behaviors. It doesn’t work. Trust me, I’ve tried it and failed.
Photo Captured By: Jaida Brinkley @j.brinkvisuals
Last summer I visited my local Chase bank and met with a Private Client Banker. We sat down, discussed my financial goals, saving, investing, and then established a budget to put into practice as a beginner. After a few months of trial and error, here are the top 5 tips for budgeting as a beginner that were most beneficial for me.
#1. Pen to Paper
Contrary to popular belief, as a young adult, there truly is a benefit to prioritizing finances early on in life. Many of us are guilty (myself included) of being easily influenced into throwing money away by eating out, shopping and other sporadic spending. While there is nothing wrong with doing so, just as much as you spend, you should keep track of where your money is going. One of the first steps to creating your budget is putting pen to paper and tracking transactions. While you’re not obligated to write each out by hand, keeping track of them by date of the transaction, amount, and expense name (dining out, entertainment, Netflix) will give you a clear idea of how (and where) you are spending money. I have personally used an excel sheet running from Sunday to Saturday that automatically calculates the total amount spent for the week.
#2. Get Specific with Savings
Your savings should be the first thing you budget for. I began estimating my total savings according to the 50/30/20 rule — 50% of your income reserved for monthly bills, 30% reserved for discretionary expenses, and 20% reserved for your savings. While 20% is the recommended percentage to save, it totally depends on your current circumstances or goals. In some cases, you may earn more and have greater savings goals, which allows you to save more. In others, you may not be in the position to save 20% at the moment, which is also fine. Saving something is better than nothing.
While the amount you save is contingent upon your net income, it is encouraged that you choose the amount with a specific goal in mind. In other words, know what you’re saving towards. For example, if you’re saving for a down payment on a home or a trip overseas, you can go as far as naming the savings account “Home” or “Travel” so that you know the money is specifically allotted for said entity. Personally speaking, it keeps me encouraged and holds me accountable for actively saving and not dipping into the account at my leisure. The more specific, the better!
#3. Prioritize Debt Reduction on Unhealthy Debt
So, if you’ve made it this far, you and I both know that this is where it can get scary. While debt is debt, certain debt can lead to better outcomes than others when used correctly. Before we jump in, here is the difference between Healthy Debt & Unhealthy Debt.
Healthy Debt — Loan or money borrowed that has the potential to increase your net worth. For example, taking out a home mortgage and building equity.
Unhealthy Debt — Money borrowed (and owed) that involved purchasing depreciating assets.
The most common unhealthy debt that we see in our twenties is typically credit card debt. While not the only type of “bad debt” that exists, I’m sure it is most relatable. We make purchases carrying a balance (**over 30% of the credit line) month after month allowing interest fees to accumulate while possibly putting us deeper into debt. We may look good on the gram, but in reality, we’ve done nothing to increase our bottom line. Trust me, we’ve all been there so no shade. However, when you know better you do better, right? Right.
So the next major step of budgeting is calculating your unhealthy debt and creating a plan of action for debt reduction. Again, this looks different for everyone, but I encourage you to take that leap and get rid of what you can.
**super side note: Credit card rule of thumb is to keep your balance under 30% of your credit line. While keeping (and maintaining) a balance builds credit, overspending (and not maintaining) negatively impacts your credit score.
#4. Establish a Weekly Spending Budget
When I first began intentionally saving, I was under the impression that in order to establish savings I simply needed to save 20% of each paycheck and I was good to go. While not totally incorrect (per tip #2), if you’re wanting to have eyes on all angles of your finances, establishing an allotted weekly spending amount is just as vital as the amount transferred into your savings account. We were able to calculate this amount by subtracting my monthly expenses, allotted debt reduction amount, and established savings amount from my total monthly income. Once calculated, I set my weekly spending budget and monitored it by tracking my transactions. #fullcircle
#5. Prioritize Emergency Fund
Once all of the above is said and done, you can move forward with what I like to call — securing the bag.
According to the Federal Reserve Board, about 40% of Americans can’t afford an unexpected emergency $400 payment. Let that sink in. If this statistic hit you as it did me, that alone should be enough motivation for you to want to get your ducks in a row. Creating an emergency fund ultimately provides security for yourself should you face extreme circumstances that affect your monthly income. For example, if you were to lose your job, you wouldn’t need to scramble for money to pay your rent or car note because you’ve saved for it. The rule of thumb for an Emergency Fund is to save at least 3 x’s the total amount of your monthly expenses. Your emergency fund can be a separate savings account linked to your checking. That way it’s easily trackable and accessible for deposits.
If you’re feeling overwhelmed after reading the above, it’s okay. I too felt all of the feels after leaving my first meeting with the Private Client Banker. Don’t let your emotions/spending patterns be the reason why you don’t take the first step towards budgeting, achieving your savings goals, and ultimately becoming the best version of yourself. While money shouldn’t be idolized in your life, educating yourself and becoming financially literate is one of the best forms of investing in YOU.