
Budgeting 101
A Beginner’s Guide to Making a Budget
- by Casper du Toit
- Updated: September 7, 2022
Learning about budgeting is not high on the to-do list of most people. They know it is a good idea to have a budget, but somehow they do not want to feel restricted. Or they think they do not need one.
However, budgeting places you in control of your finances – it is the first step toward financial freedom.
The purpose of a budget is not to prevent you from enjoying life’s little pleasures. It is to help you manage your finances. And the good news is that it is easy to learn how to budget.
Table of Contents

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What’s the Definition of a Budget?
Budgeting is the process of finding a balance between incoming funds and outgoing funds. The tool used to manage this process is called a budget. It allows you to plan and allocate money in advance to essential items, non-essential items, and savings.

Why Budgeting Is Important
The average person has many expenses, from buying food to paying for a loan. It is hard to keep track of all these expenses in your head. And calculating if you have enough money left until your next paycheck is a headache.
And it is not only about the risk of running out of money. It is also about making life easier for yourself. You don’t want to wonder every time you want something if you have enough money to buy it.
By budgeting and sticking to it, you can avoid unnecessary stress.
How to Make a Budget in 5 Easy Steps

Making a budget is about creating a plan to help you manage your finances.
Step 1. Determine your after-tax income.
After-tax income is the money you’ve got available to save, invest, or spend on the things you need or want. It’s your take-home pay.
In addition, your budget should include interest and dividends received, investment income, and gifts/refunds. And if you have savings you intend to use, add them to the list.
Step 2. Make a list of all your expenses.
Make a list of your typical monthly expenses.
Refer to any relevant documents that can help you, such as bank statements, credit card statements, receipts, and paid bills. Consider new, upcoming expenses and include them in your budget.
Step 3. Separate your expenses into needs and wants.
Once you’ve made a list of all your expenses, separate it into needs and wants. Needs are essential items you have to buy or pay for. Wants are non-essential items that are nice to have.
Examples of needs include:
- Debt & Loan Payments – Includes mortgage, car loan, credit card, and any loans.
- Monthly Accounts Payable – Includes rent, utilities, school fees, and child support.
- Insurance – Includes car insurance, life insurance, and health insurance.
- Food, Clothes & Groceries – Includes household supplies and pet food.
- Health – Includes medicine and visits to the doctor or dentist.
- Transportation – Includes public transportation, gas for the car, and car maintenance.
Examples of wants include:
- Entertainment & Leisure – Includes eating out, sports, hobbies, movies, and gym.
- Charity & Gifts – Includes religious and charitable donations.
- Luxuries – Includes brand-name shoes and clothes, and jewelry.
Step 4. Add savings & investments.
If you neglect to budget for savings and investments, you’ll likely never have money left to save or invest.
Under savings, include items such as retirement savings and extra debt/loan payments. And you should have an emergency savings fund for unexpected emergencies.
In addition, you can also include a savings plan to save up for something you need or want.
Under investments, you can include stocks, bonds, mutual funds, real estate, index funds, options, and precious metals. (You don’t have to include all of these)
Step 5. Balance income and expenses.
After you deduct your expenses (including savings and investments) from your income, the total should be zero. Your incoming and outgoing funds should balance out.
Target = Zero balance – Your expenses, savings, and investments equal your income.
Positive balance – If you have money left in your budget, add it to savings, investments, or another budget item.
Negative balance – If your expenses exceed your income, cut back certain items until your income and expenses balance out.
By following the above steps, you’ll be able to create a fit-for-purpose personal budget.
It will take a while to complete when you do it for the first time. But, once you finish the work, it becomes easy to manage. You then only need to review and update it.
To give you a head start, download our budget template. It’s an easy-to-use Excel template. Feel free to change the item descriptions based on your unique circumstances.
Budget: Plan vs Actual
Your budget spreadsheet should have a “budget” and an “actual” column.
A budget is a forecast. It’s what you’re planning to spend, save, or invest.
It contains expenses that are either fixed or variable.
Fixed expenses – Fixed expenses do not often change, such as your mortgage and car loan.
Viable expenses – Can change from month to month. The best way to budget for it is to look at how much you’ve spent the previous month. Food and groceries are examples of variable expenses.
Tip: Treat savings as a fixed “expense” by saving at least the same amount of money every month. It can be either a fixed amount or a percentage of your income. Don’t wait until you’ve paid everything before you try to save what’s left.
Every budget should show the amount of money spent, saved, or invested.
You need to be able to compare budgeted versus actual expenses. The difference between your budget and actual results is called a budget variance. By managing your budget variances, you’ll be able to plan better.
Reasons for a Budget
The top reasons for a budget include the following:
- It encourages you to save
- Helps you differentiate between needs and wants
- Deters impulse buying
- Helps you plan for unexpected emergencies
- Helps you plan how to get the things you want
- Gives you time to think about what you want
- Monitor where your money goes
- Do not get into trouble for forgetting to pay a bill
- Puts you in control of your finances
- Supports both short-term and long-term goals
- Gives an overview of how well you’re doing
- Helps you reassess/reduce your expenses
Broke? Low Income?
Do you need a budget if you are broke?
The short answer is that unless you have no income at all, you need a budget.
If you don’t have an income, your priority should be to find a way to make money. But if you are making money, you should start budgeting.
Most people who complain they are broke have an income. They just run out of money too soon. With a budget, you’ll be able to identify where your money goes and how you can better manage it.
What if you have a low income?
It does not matter if you have a low income or feel you do not earn enough to have a budget. It also does not matter if you do not have a stable income. As long as you make money, you need a budget.
Even if it is a simple budget that only shows your income and some expenses, it is still good to have one. As your financial situation changes, you can adjust your budget accordingly.
The 50-30-20 Budget
The 50-30-20 budget is a budget plan from Senator Elizabeth Warren and her daughter Amelia Warren Tyagi, detailed in their book All Your Worth: The Ultimate Lifetime Money Plan.
It’s often referred to as the 50-30-20 rule and has gained much popularity over the years.
Based on this budget plan, you should spend your after-tax income as follows:
50% on Must-Haves
30% on Wants
20% on Savings
According to the authors, “must-haves” are the things you need, and “wants” are stuff that’s just for fun.
For example, if your take-home pay is $5,000, no more than $2,500 should go towards your needs. You can spend up to $1,500 on the things you want and save $1,000.
What I like about the 50-30-20 budget plan
It’s not complicated. But what I like the most about it is that it proposes a balance between needs, wants, and savings.
There is a saying, “All work and no play makes Jack a dull boy.” To live a fulfilled life, you need a balance in your life. And this balance also applies to your finances.
Life isn’t about only spending money on your essential needs and saving what you have left. It’s also about enjoying life’s little pleasures.
Establishing a balance between what you need and want and how much you save impacts the quality of your life.
What I do not like about the 50-30-20 budget plan
It’s too restrictive.
The 50-30-20 budget, as proposed by Elizabeth Warren and her daughter, is more of a rule than a plan. According to them, you can only move away from it at “special times in life.”
It creates the impression that unless you stick to the 50-30-20 ratios, there is something wrong with your budget plan.
A budget needs to allow for more flexibility. One size doesn’t fit all.
For example, a divorced man earns $3,000 per month after tax. He has to pay 25% of his income ($750) towards child support. Based on the 50-30-20 rule, he only has $750 left for his rent, car loan, student loan, insurance, food, etc. It’s simply not workable.
So even though he doesn’t have enough money for his essential needs, he should spend 30% on fun stuff and save 20%? It makes no sense. It’s not the right budget plan for him.
In his current circumstances, a 70-15-15 ratio would be more appropriate. It will allow him 70% for needs, 15% for wants, and 15% for savings.
Budgeting Tools
Creating a budget from scratch can be very time-consuming. Fortunately, there are budgeting tools you use to speed up the process.
Budget Apps
Here’s a list of popular budget apps you can use.
Mint– One of the most popular budget apps. It’s free to sign up for an account and easy to use.
Goodbudget – A good app for helping you keep track of your income, expenses, and savings. They have a free version and a paid plan that costs $8 per month or $70 annually.
You Need a Budget (YNAB) – An app that doesn’t only show income and expenses but tries to help you save and pay off debt. It costs $14.99 monthly or $99 annually, and you can try it for free for 34 days.
Budget Templates
Not everybody is comfortable using a budget app. Although budget apps are generally considered secure, you may prefer using a worksheet or spreadsheet.
Here’s a list of budget templates you can download.
xUSD Budget Template – This is my budget template. It’s an Excel spreadsheet that separates all expenses into needs and wants. It also covers savings and investments. It’s 100% free and easy to customize.
Microsoft Office Budget Templates – Microsoft offers several Excel spreadsheets. Some are free to download, while others require you to have a Microsoft 365 subscription.
Vertex42 Budget Templates – Vertex42 offers several free Excel worksheets you can download. Their templates also work with OpenOffice and Google Spreadsheets.
The Consumer Financial Protection Bureau has a couple of useful but rudimentary PDF templates you can download. They are:
Spending Tracker – You can use it to consider what’s important to you.
Income and Benefits Tracker – It is a weekly income and benefits planning tool.
Monthly Budget – A budget tool to see how much you make and spend each month.
Top 10 Budgeting Tips

Many people find it hard to stick to a budget. Some don’t even get past the first month and try to convince themselves it’s a waste of time and doesn’t work.
After reading this article, I am sure you’ll agree that having a budget and sticking to it is a wise choice. Starting something new isn’t always easy. Budgeting, like many other things in life, gets easier over time.
Once you realize you’re in control of your money, budgeting can become a fun experience.
As we get to the end of the article, I want to leave you with ten final tips that will help you budget like a pro.
#1. Choose the right budgeting tool to use
It doesn’t matter if you do your budget using an app or a template you’ve downloaded. If doing it on the back of a cigarette box works for you, then do it. Use what works best for you.
#2. Your budget should not deprive you of life’s little pleasures
If budgeting makes you feel sorry for yourself, you’re doing it wrong. You can and should include non-essential things you want in your budget. The only trick is to keep a healthy balance between your needs, wants, and savings.
#3. Don’t get stuck on an item
If you are unsure if you should include an item or how much to budget for it, move to the next one. You can always get back to that item later. Don’t waste too much time on it or allow it to frustrate you.
#4. Update your actual expenses regularly
Don’t try to remember everything you’ve spent money on in your head. Don’t keep all your receipts in a box, and try to update your budget later. If possible, update your budget as and when you spend money. If you can’t do it daily, try to do it at least once a week.
#5. Use a debit card and leave your credit card at home
Use cash or a debit card to pay for your purchases, if possible. The advantage of a debit card is that your transactions appear on your bank statement. It is helpful if you lose a receipt, and it’s also safer than carrying cash. Avoid using credit cards unless you can settle them in full every month.
#6. Pay yourself first
Don’t only try to save what money you have left at the end of the month. You’ll find you often have nothing left to save. Perhaps you can’t save 10% or 20% of your income after tax right now. But save what you can and do it before you start spending money on other budget items.
#7. Pay more than your minimum debt payments
The sooner you can get out of debt, such as high-interest credit cards, the better. By only paying the minimum amount due every month, it will take you a long time to settle your account. Try to pay a little bit more every month, even if it’s just 5% or 10% extra.
#8. Set SMART goals
SMART is an acronym for Specific, Measurable, Achievable, Realistic, and Timely. Use your budget to set SMART goals and not just to manage your income versus expenses. For example, set a goal to pay off your VISA credit card within ten months.
#9. Don’t overcomplicate things
The simpler you keep your budget, the easier it will be to manage. All expenses can be separated into needs and wants. Use your last month’s expenses as a starting point.
#10. Your budget must be flexible but realistic
You can add any item to your budget and change it as often as necessary. But don’t put something in your budget that’s unlikely to happen. Budgeting is not an exact science but try to keep your budget as realistic as possible.
Conclusion
xUSD advocates that personal finance requires a balanced approach. The key areas to focus on are making and saving money, investing, and paying off debt. You can’t only focus on one of these areas. You have to manage all of them.
A budget helps you to link all of these personal finance areas together in one place. It doesn’t only give you a good overview of them but also assists you in managing them.
By learning how to budget, you are taking an important step toward managing your finances.
Let me know in the comments what part of the article you found the most useful, and please share the post on social media.