Financial planning is a key element in today’s economy. If anything, it is risky to exist without having a proper budget or a financial plan.
Everyone dreams of gaining control over his or her finances and working towards their financial goals. To achieve this, you need a budget.
However, when it comes to budgeting, people are always fixated on searching for the perfect formula, while others assume budgeting is like rocket science and is one of the most boring activities ever.
To debunk these myths, first things first, simply because your friend or family member tried budgeting and it didn’t work out, doesn’t mean that it’s impossible. Consider the possibility that they didn’t have sufficient planning or the right information about budgeting.
Granted, managing your finances may seem stressful and overwhelming at first, but it’s not! If you take the fear out of budgeting, you will realize that it is productive spending, rather than the misconstrued notion that it is restrictive.
Therefore, relax and follow the steps provided here to make the most out of your budgeting, and achieve your financial goals.
A budget illustrates the amount of money being brought in (income) against the expenditures, within a specified period.
Ideally, a budget acts as a financial planning tool, that enables you to plan how to spend or save money on a monthly basis, and keep track of your spending patterns. Making a budget allows you to prepare for the future, since the process helps you prioritize your financial goals and gives you financial security.
Having a well stipulated financial goal and priorities is essential, as it will give you purpose for saving. For instance, if your financial goal is to buy a new house or car or even save up for retirement, when you create your budget you’ll be sure to add your financial goals and work towards achieving them.
Don’t be shy, jot down any goal you’ve always wanted to achieve but you were restricted financially. Do a simple goal mapping plan and illustrate your goals and how you plan to achieve them. Be smart and specific about them.
Creating a budget plan prevents you from spending money that you don’t have, and helps you prepare for emergencies, such as injuries, illnesses, divorce, death in the family or losing your job.
Life is very unpredictable. Therefore, being financially set puts you at an advantage of tackling the situation better. Can you imagine being low on funds and in a sticky situation?
Step-by-step guide on how to make a budget
Granted, getting on track with a new budget may be difficult at first, but it’s not impossible. Follow these steps and start budgeting immediately, but give yourself time to adjust.
Plan ahead of time, don’t postpone budgeting because of seasonal expenses. Start small and build up to the process, improving as time goes by.
Make realistic budgeting goals, that create a clear distinction between wants and needs, and take the first step of how to make a budget.
There are various budgeting methods to choose from, as well as hundreds of budgeting apps, journals, and even spreadsheets to help you make a budget. Basically, these apps, journals or spreadsheet simplify your work based on specific criteria: For instance, a spreadsheet requires the user to be actively involved in the process while the rest of the methods require simple input such as filling data about your expenses and the budget plan will automatically be produced. Ultimately, these methods should help you understand where your money is going when they are used properly.
You can choose to use any of these online apps to get you started with your financial planning. However, consider your expenses and income, work with what you have.
A. Trace every prior financial expense/Budget off past expenses
Creating a budget based on your past expenses, such as bank statements, utility bills, investment accounts, and other such information, while considering your sources of income, will provide you with a rough idea of monthly-average expenditure, which can help to make a budget.
Financial planning requires time, it is not something that can be done overnight. Therefore, start from your previous expenses to gauge how you are going to go about it.
However, for this method to be completely valid, you should track recurrent expenses, as well as unexpected expenditures on a monthly basis. The first step is to determine how much you spend by focusing on one month’s expenses, and establishing a baseline for your monthly expenses. Doing this will provide a guideline for you to base your budget on.
B. Budget based on your monthly income
Creating a budget based on your income ensures that every penny you make is assigned to a specific role. This method prevents overspending and makes it easier to manage your expenses.
Most importantly, it prevents you from spending money that you don’t have. On the bright side though, it helps you achieve your financial goals.
A general rule of thumb that comes with this saving method is the 50-30-20 (needs, wants, and savings, respectively) budget breakdown.
If you have more than one source of income, consider them as you create your budget.
Whether you are in self-employment, freelancing, or receive a regular paycheck, where taxes get deducted automatically, record the total amount of all the sources of income on a monthly basis.
Having several sources of income increases your potential of succeeding at budgeting, of course, if you are smart about how to distribute your money according to your expenses.
Jot down all the expected monthly expenses, starting from car payments, utilities, groceries, loans, retirement plans, savings, and rent or mortgage payments- basically, everything you spend money on.
Doing this enables you to differentiate between seasonal expenses, such as emergencies, and prepare effectively by setting aside an emergency fund.
Consider expenses that remain relatively static and are an essential need for your survival, such as rent or mortgage payments. Fixed costs are vital to your living and will likely not change as you create your budget.
On the other hand, variable expenses, such as entertainment or groceries, are subject to monthly changes and hence, adjustable to fit into your budget. It is always a good idea to overestimate your monthly spending: This will allow you to handle an unexpected expense without causing you any financial strain. Also, you can set aside some money for emergencies(such as car repairs) during your financial planning and live a worry-free life.
Tallying your monthly income and monthly payments will indicate whether you are on the right track or not. If your income surpasses your costs, then you are on the right track, otherwise, adjustments need to made. Consider making some cuts if you realize that you’re spending more than you earn. Remove all the unnecessary expenses, for instance, if entertainment and impulsive shopping are the culprits of this, find a way to cut your expenses to a point where you are left with at least 20 percent of the income after budgeting.
Regardless of the saving method, budgeting aims to create a balance between your monthly income and monthly payments. Therefore, if costs overlap your monthly income, necessary changes need to be made in your expenditure.
As you create your budget, you will realize that some of your expenses are unnecessary, while others are a must-have. Therefore, do away with the unnecessary expenditures.
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