How to Budget
Have you ever thought about how to budget? With the increased living expenses and financial pressure, many people started to become more and more interested in budgeting. You need a budget is the best and the most common personal financial advice that experts will give you. It can give you a roadmap to know where your money can go. A budget can help you to use your hard-earned money responsibly. To have the right spending habits and meet your long-term financial goal, you need a personalized budget. Therefore, in this article, we will explain how to budget and set and follow a personal and household budget.
What Is a Budget?
Budget is a financial planning tool that can help you plan how much money you can spend or save in the respective month. Besides, it can also help you to track your spending habits. Although it is not an exciting thing for many people to make a budget, it is important to keep your financial house in order. Because the budget depends on balance, if you spend in one area, you will have more to spend on other areas. Besides, it can also help to save up money for rainy days and can increase your savings.
However, always remember that budget will work in your favor if you are honest about your expenses and income. Use accurate information about your spending habits to have an efficient budget. In this way, the result of your budget will show complete detail about your inflows and outflows.
Importance of Budgeting
Although many people have an idea about what budgeting is still they are confused why they need to set and follow a personal and household budget. According to a survey, many people are interested in it due to stagnant incomes, growing debt burdens, and medical costs. Consequently, they try to limit their spending to save more money, but it won’t be easy without a proper budgeting plan.
Because as it is not easy to shed pounds if you have no idea about how many calories you are consuming. Similarly, you won’t be able to save money without tracking your spending and whip your finances into shape. Only a budget can help to shine a light on where your money is currently going.
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Have a look at the points below to learn about the importance of budgeting in detail:
● An Effective Way of Managing or Avoiding Debts:
To meet the high cost of living, millions of people find themselves weight down with hefty interest payments. After paying a large sum on your credit card account, you will end up spending more than you earn. Consequently, you will not be able to pay your credit card balances. And when it comes to budgeting, a basic principle is not to spend more than your income.
● Help Achieve Short-Term and Long-Term Goals:
Each of us has the financial goal we want to achieve, like saving money for a down payment on a car next year or buying our dream house in the next five years. You can spend your golden years in comfort; therefore, your budget plays a great role in tracking how much you can save monthly from your income and help allocate money accordingly. Although a good budget requires you to make few sacrifices like giving up on eating out, it will benefit you later. Through your budget, you can anticipate your expenses like car expenses, phone bills, or utilities.
● Prepare You for Rainy Days:
Without a budget, it is not easy to save money as there are high chances that you will end up spending more than you earn. But as a human, there are always emergency cases when we are in dire need of money, like when your car broke down or your home plumbing spring leaks. But with the help of a budget, you will save some amount each month, which can come in handy in case of emergency or on your rainy days.
● Encourages You to Invest in Your Own Finances:
Lastly, budgeting is a process that can discipline you about your finances and encourages you to manage your finances more efficiently. Numerous studies show that people who stick to their budget have higher chances of reaching their financial goals because they are emotionally invested in the process.
Steps to Make a Budget
These days’ people prefer to use tools like spreadsheets to make their personal and household budgets. However, if you have no information about spreadsheets, don’t worry; there are numerous other ways to create a budget. But in order to do so, firstly, you need to determine how you are spending your income each month. Therefore, once you create a budget, you will feel more comfortable and better positioned to hold your finances. The most critical step in this regard is to find a way to track your finances.
Here are simple steps that you need to follow to create a budget:
1. Note Your Net Income:
To create a budget, at first, you need to identify your inflows. In simple terms, the sum of money, you are earning each month or getting from any other sources. There are high chances that you will overestimate your spending if you consider your total spending. Therefore, whenever you are noting your net income write it after deducting taxes, social security, 401 (k), and flexible spending account allocation. The amount left in your income after deducting all these is your net income, and you have to make your budget according to it. This is for people with fixed monthly income.
In the case of freelancers or those with inconsistent monthly income, you need to increase your income. Therefore, if you have any hobby or talent that can make money, utilizes it to have an additional source of income. It would be very helpful if you ever lose your job.
2. Track Your Spending:
Once you have identified your net income, it’s now time to calculate your spending or expenses. Categorize all your spending after tracking them so that you will know where you can make adjustments or amendments. Moreover, it can also help you identify the areas where you can cut back on your expenses and save money.
Start by tracking all your fixed expenses. Generally, these include rent, mortgage, car payments, or utilities. And in most cases, it is not possible to cut back on these. However, identifying how much you are spending on fixed expenses will be of much help because it can give you an idea of where the portion of your net income went each month.
Now it’s time to track your variable expenses. These expenses vary from month to month and include gas, grocery, entertainment, vacations, etc.; with a little trick, you can easily find an opportunity to cut back on these expenses. You can start with your credit card or bank statement.
To be more accurate about your spending, it is better to record your day-to-day spending. You can either write it on paper or use an app on your smartphones.
3. Set Your Goals:
At this point, you are ready to set your budgeting goals to make your personal and household budget. Always remember that don’t jump to creating a plan once you have tracked all your financial information. First, it is important to have your financial goals, both short-term and long-term, you want to achieve. As for short-term goals, you can set goals you want to achieve within a year. On the other hand, your long-term goals may include your child’s education or saving for your retirement. Besides, these goals are not set in stone, and you can change them if your priorities change. But still, it would be better if you determine your priorities in advance. If your short-term goal is to reduce your credit card debt, it is better to cut back on your spending.
4. Make a Plan:
Now you are finally at a stage to make a plan for your budget. To have a rough estimate of your coming month’s spending, use both variable and fixed expenses. As for fixed expenses, they will give you an exact number which you will be spending. However, for variable expenses, you can use your past spending habits as a guide, and it will help you predict your coming month’s variable expenses.
Besides, to have a better picture, break down all your expenses into the things you need and the things you want. For example, if you use your own car to go to work, you need to count gasoline costs as well. On the contrary, a monthly subscription to Netflix is something you want. To make a good budget, it is essential to learn about these differences to help you make adjustments greatly.
5. Adjust Your Habits:
Once you make a plan, you are almost done with making your budget. You have documented your net income and all expenses. Now it’s time to look for the places where you have left money, or you can cut back your expenses to have more money towards your goal.
The first thing to look at is your expenses especially variable expenses, where you can cut back money. Is it possible for you to skip a movie night to see it at home? If yes, adjust your numbers you have noted till now and see how much money it can free. Generally, at this point, you are trying to free up your money you will spend on your wants. But don’t forget to evaluate your needs as well. For example, it is possible that you need an internet connection for your home. However, is it really important to have the fastest one?
Finally, if you think it doesn’t make much difference, try to adjust your fixed expenses. Although it is quite difficult and requires greater discipline, it can make a big impact if you do. Moreover, big decisions also come with big trade-offs; therefore, always evaluate your options carefully. Remember that small savings can make a big difference so, never ignore them. You will be surprised to see the money you will save from these minor adjustments.
6. Keep Checking In:
Lastly, once you make a budget, don’t forget about it. Instead, keep reviewing the money you spend and your budget to make sure you are on the right track. Besides, you can also compare your expenses with other people like you or have the same income. There are few things in your budget that are set in stone. If you get a raise in your income, your expenses will also increase. Besides, there is a high chance that you may reach your goal or you want to plan for a new one. Regardless of the reason behind it, keep on checking your expenses to stay on track.
Common Budget Mistakes
There is no guarantee that it would be perfect when it comes to budgeting, and it is always considered an imperfect process. Therefore, if things don’t work in your favor at first, don’t get discouraged. Moreover, to increase your chances of having a good budgeting plan, learn from your past experience. Besides, there are also certain budgeting mistakes you must avoid to get good results. These are:
● Unrealistic Expectations:
Most of the time, people set unrealistic financial goals and have unrealistic expectations. And obviously, they cannot achieve those expectations from their budget and end up getting frustrated. Therefore, whenever you are setting your expectations, make sure that it is in accordance with your net income and expenses.
● Budget Based on Gross Income:
Gross income is the total income you will earn before deducting taxes and your health insurance premiums. And in reality, your actual income is always less than gross income. Therefore, whenever you make your budget use your net incomes as a guide because it is the amount you are taking home each month. See your bank deposits to learn about your actual cash inflows and calculate your budget based on them.
● Failing to Consider Big Changes:
Another common mistake regarding budgeting is that people fail to learn about big changes. When people feel that their income is not enough to meet their expenses, they try to find discretionary expenses to cut. For example, they may give up on cable TV or eating out. Although these little cuts are helpful at times, the real problem is the fixed expenses. Therefore, try to fix your fixed cost like you can get a roommate to cut your rent or sell your car with $400 a monthly payment. Or you can downscale your cell phone plan.
So, avoid these mistakes and always try to find ways that can help you to save money and cut back on your expenses.
Effective Budget Tips
Below are some of the effective budgeting tips:
- Never mix your necessities with luxuries. There is a fine line between them so try to learn their difference. For example, eating is a necessity but eating out is a luxury. Therefore, trim your expenses you spend on luxuries.
- Keep an account of the small stuff like spending time in coffee shops. Try to add all this amount of a month. When you add this small amount, its sum might shock you. Therefore cut on all these costs.
- Instead of using debit or credit cards, use cash. Because it can restrict you from overspending moreover, always write the amount you spend in a register to have an accurate figure. Set limits on your spending amount through your budget and monitor your progress.
- You can use a debt consolidation plan if you have a large amount of debt because it can lower your interest rate and payment.
- Find your spending habits and try to restrain yourself from overspending. Earning more money doesn’t mean you can increase your expenses as well. Instead, use this money for saving.
- You can also manage your debts through your budget. One of the goals of a budget plan is to bring your debts to zero.
- Try to adjust your budget each month to cover all changes and know whether you overestimate your expenses. Moreover, keep an eye on large expenses that happen few times a month, as an insurance payment.
- In case you have overspent in a certain category, you can use budgeting hacks to keep yourself on track.
- Learn about financial skills to improve your financial literacy. It can help you to make a better budget and manage your funds more efficiently.
- j. Always have a buffer in your budget or, in simple words, save some money for unexpected expenses. Thus, it can stop you from overspending.
- In case you are living with your family, always make a budget together. Because if you do it alone, there are high chances that you might ignore certain expenses.
The easiest way for a beginner to start using a budget is the 50 30 20 rule. It makes it simple for anyone to take control of their spending, and make fast gains in financial security. See next question below for the description of the rule.
It is a simple way to budget, you just spend 50% of your after-tax income on needs, 30% on wants, and 20% on savings or paying off debt. It is a good way to get started using a budget for beginners. Another easy rule is the 70 20 10 rule, see below for an explanation of the rule.
It states 70% of your monthly budget should go to monthly expenses. 20% should go to savings, 10% should be donated. The main thing is you are aware of where you are spending your money, keep in mind the three golden rules of spending money, see below.
1: Don’t spend more than you make.
2: Always plan for the future.
3: Help your money grow.
These sound easy but it is easier to get distracted. There should be a fourth rule and that is do not spend needlessly on any depreciating assets, ever.
It mostly depends on your definition or understanding of what being rich is. If you want to have access to lots of money or rather never having to be a slave to the pursuit of money, then yes. Breaking free from the bondage of having to work very hard for money and learning to have money work hard for you can easily be accomplished in 5 short years.
If you are just entering your 20’s it is very possible, yet unlikely that you can become rich in your 20’s. Unlikely because statistically speaking, most 20 year old’s do not become financially independent. Rather it is a decade that most dig themselves deep into debt.
The best way for you to change the odds and get rich in your twenties is to own your own business. Starting a business generally takes money (that is used as leverage) to get it going, there are of course other ways to leverage a startup business, such as using your network of friends, colleagues, and family.
Budgeting is a roadmap that can give you complete information about your net income and expenses. Therefore, if you make a proper budget plan using the steps mentioned above, it can help you overcome a lot of your financial difficulties and gain your financial goals. However, you also need to keep budgeting tips in mind in order to have good results and an efficient budget.
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