Have you ever wondered why some people are so good with their finances while others aren’t? There’s a high chance that their success is a result of planning their money based on their priorities and financial goals.
At its core, budgeting is the foundation of all financial plans. A budget is a careful balance between your income and expenses. It doesn’t matter whether you are getting by from paycheck to paycheck or earning a six-figure salary, creating a budget provides you with a roadmap for where your money is going and helps you make your income work for you.
Unlike the infamous belief that budgeting is restrictive and limits your freedom, in reality it gives you freedom. Budgeting is all about understanding how much money you have, where you spend it and then planning how to allocate your funds. It helps you determine whether or not you have sufficient funds to achieve your financial goals and pay for the necessities in your life. Having a well thought out budget is your key to financial success, and you’ll never find yourself in a position where you lack funds to cater to your lifestyle goals and needs.
Read on for top budgeting 101 tips to help you come up with a foolproof financial plan to ensure you achieve financial success.
Table of Contents
Budgeting Basics
According to research, budgeters are less likely to report any financial hiccups, struggles, or live from paycheck to paycheck, compared to spenders. Do you know why having a budget is essential? At face value, creating a budget seems like a cumbersome exercise, especially if you feel like your finances are in check. But you may be surprised at how important a budget could be. A budget is an action plan and a clearly defined roadmap to help you achieve a specific financial goal, be it saving for retirement, getting out of debt or keeping up with your daily/monthly financial needs. The bottom line is a good budget can help you keep track of your expenses and even help you find out ways to free up money which you can use elsewhere.
How to make a Budget
This is usually one of the hardest tasks when it comes to budgeting – how to make a budget. Agreed, making a budget can be overwhelming at first considering the bad rap the term has. And to answer all your questions, yes! Good budgets work, creating them is not rocket science, and it doesn’t have to be a bore. While budgeting is an excellent step towards your financial goals, it’s important to outline why you want to make a budget in the first place because your goals ultimately impact the decisions you make during the process. For instance, your goals for budgeting may include:
Expense Categories
Before you can come up with a realistic budget, you need to do a nose-dive into your current expenses. You need to have a clue about where your funds are going. A good way of doing this and coming up with your expense categories is by tracking your expenses for about one month to determine the baseline of your monthly expenses. Alternatively, you can opt to create your expense categories based on your monthly income, also known as a zero-based budget, where you allocate every penny you make to a particular role.
To make the budgeting process easy on you, below is a list of expense categories you should have:
Break the Overspending Trend
Well, the main reason why we create a budget is to help us keep our finances in check by tracing the amount of money we are bringing in, spending, and what we are spending it on. It’s a way of balancing our income versus our expenses. Therefore, if you are going astray from your budget, it’s because you’re spending too much money somewhere. Understanding the reason why you are overspending can help you stop and keep your budget on track.
Stick to using Cash
Have you ever gone shopping with your friends, only to come back home having maxed out your credit cards? Well, in the current economy swiping plastic is the most convenient method of payment, but this convenience comes at a cost. Credit cards and debit cards make it so easy to overspend. One way to ensure that you stick to your budget is to use cash. Yes, it may not be that fast or reliable but it helps to keep track of how much money you are spending.
Automate your Savings Plans
With all the hustle and bustle in our day to day lives, it may be difficult to remember to deposit money into our savings plans. Therefore, automating your savings is an easy and sure fire way to stay on track of your saving plans. And the majority of banks offer automated transfers between your checking and saving accounts, which allows you to schedule contributions on every payday. Automated deposits ensure that you stay on track with your saving plans and minimize the temptation to spend the money elsewhere.
Have Realistic Financial Goals
If you are planning to save money, having a specific goal to work towards is essential. Figure out what you want to achieve in the short and long term. For instance, saving money to go on a vacation in the next three months, saving for college, saving for retirement, or planning to buy a car or home in the next two years. Consider what you want to accomplish, then break it down into S.M.A.R.T actionable steps and set a timeline for achieving them.
Setting financial goals is fundamental as it allows you to align your budget with actually accomplishing them. It helps you determine how much you need to set aside to accomplish your goals and motivate you to achieve these goals. And to be effective, your goals should be framed in the manner below:
Setting realistic goals is key to creating a good budget. Otherwise, it’s just a wish list or shift-spending which means in the long run, you’ll have nothing to show for your money.
Get yourself the right saving resources
Saving money is less challenging when you have the right tools and resources at hand. Budgeting apps such as Mint, YNAB, Financial Capital or Mvelopes, can help you maintain your budget while on the go and track your expenses automatically. Generally, these apps allow you to synchronize all your bank and credit accounts in one place which will enable you to monitor how you are doing with your financial goals.
In all honesty, budgeting is imperfect. So, don’t give up if things don’t go your way on your first try, it’s all about trial and error until you find what works for you. However, to maximize your chances of financial success, consider seeking help and asking for advice from other people. But be selective in the advice you choose to follow. Below is a list of common budgeting mistakes that you need to avoid:
Having Unrealistic Expectations
Ensure that you set a budget which you are willing to stick by. Otherwise, you are setting yourself up for frustration and stress.
Budgeting Based on Gross Income
When you are creating a budget, consider the fact that you are allocating each dollar a specific role. Therefore, you need to base your budget on the net-income or take-home pay, which is the total of your income minus taxes and other deductions. Go through your bank deposits to see the actual cash inflow and budget off that amount.
Failing to Make Adjustments to Expenses
Often, people who find themselves in a financial rut choose to cut discretionary expenses. Consider the fact that canceling cable TV or eating out won’t make much of a difference. Sometimes making adjustments on fixed significant expenditures, such as moving to a cheaper house or getting a roommate to cut the rent by half, is what you need to get yourself out of the financial problem.
Neglecting to Update your Budget
While you don’t necessarily need to rewrite your budget on a monthly basis, it is vital to review it, and ensure you address changes if any. You’ll probably incur changes or new expenses as you go, say by signing up to a g gym or monthly spa day, whatever it is include it in your budget to ensure you stay on track with your savings and goals.
Did you find this helpful? Comment below and tell us about your favorite budgeting hacks.
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