12 Personal Budgeting Tips For First Timers

Creating your first budget can be extremely overwhelming. So overwhelming, in fact, that only 40% of American families have a working monthly budget. But it’s worth the effort. Developing a budget that you can maintain over the long term has been definitively linked to building wealth, while simultaneously helping you get out of debt and cut expenses.

In short, I was spending money on the things I needed and wanted without determining first whether I could truly afford them. After overdrawing my checking account once or twice, and having to pay several bills with credit cards because of my lack of a working budget, I decided to get real and begin a budget.

If you’re a first-time budgeter, here are 12 steps to make the process as smooth and painless as possible. If you are reading this article, chances are that you have already made the decision to begin a working budget. For many people, myself included, this is the hardest part. Read on to get started with next steps.

If you have savings, checking accounts, investment accounts, or any other financial instruments, you will want to know how much money is in each account as well as the interest rates and expenses of each one. Make note of this information as it will become important in determining your net worth and the best use of your capital in the future. For some people, this is easier than others. Those on a salaried pay scale can easily find their monthly income.

For hourly employees or those who work in a business where income may rise and fall unpredictably, this can be much more difficult. The most important consideration, regardless of how you earn your monthly income, is to determine the average monthly amount of income that you receive. A good way to do this, if you receive irregular income, is to average out the last 6 to 12 months of recurring income and use that figure.

If you want to be extra conservative, you can choose the lowest monthly amount you have earned in the last year, which will hopefully provide you with a worst case scenario. Determining your monthly recurring debt payments should be your next step. This should be fairly simple to do, as long as you have stopped incurring additional debt in the short term.

If you haven’t been able to break your dependence on credit cards, that’s okay, as building a budget will act as a first step for your next financial priority which should be getting out of high interest consumer debt. To find out what your monthly recurring debt payments are, calculate the total amount owed on each debt account as well as the minimum monthly payment. This includes car loans, mortgages, credit card debt, student loans, and all other debt that your family pays on a monthly basis.

This will provide you with the first few line items in your budget, and will allow you to determine your net worth. Once you know how much money you have and how much you owe, you can easily determine your net worth. Just subtract what you owe from what you have, and you will derive a number. This number will tell you the value of your financial resources.

For me, this number was an eye opener. When I built my first budget, I had a negative net worth. I assume this is fairly common in America, especially for young people just starting out. This can be the hard part for many people. The best way to determine your monthly expenses is to make a stack of household expenses for a month.

Keep your receipts, your utility bills, and any other expense that arises during a one month period, and divide these bills into categories. The categories can be as general or as specific as you want them to be. I keep my categories extremely general (automotive/household), whereas you may prefer specific itemized categories such as (car wash/electric bill). Either way works well, as long as you determine an average amount of expenses for each category. It used to be, if you had a budget, you had an old school paper ledger.