The Essentials of Making a Budget
Creating your first budget can be an overwhelming experience. In fact, only 40% of American families have a working monthly budget. However, budgeting can progressively help you achieve your goals and get out of debt.
Budget making has actually been linked to building wealth.
What is a budget? Budgeting is the process of creating a workable and solid plan to spend your money. If you learn how to make a budget, you will determine in advance whether or not you have enough cash to spend on things you like.
Creating a budget simply means balancing your expenses with your income. A lack of this balance might cause you to spend more than you earn, creating a problem.
Why Is Creating a Budgeting so Important?
A budget ensures you always have enough money for the things you need. This is true even if you don’t earn much since you will prioritize your spending. When you have a budget, your focus will only be on the most important things.
Mastering how to budget money has another advantage. It will prevent you from accumulating debt or help you work your way out of it.
What is Budget Forecasting and Planning?
Once you draft your first budgeting plan, you can start using it to have a feel of how it will keep your finances on track. You may decide to map out your budget for a couple of months to a year.
This puts you in a better position to forecast which months have tight finances and when you are likely to have extra money. You can then find practical steps to even out the highs and lows of your finances. Budget planning helps you have a more manageable and pleasant life.
Budget forecasting also allows you to predict how much money you can save for a vacation, a new vehicle, or a new home. It can also be a practical way to save up money for emergencies and home renovations.
A realistic budget helps with your long-term financial planning. You can eventually achieve goals such as starting your own business or retiring.
Follow These Steps to Put a Solid Budget Plan into Action
A sound budget is the starting point of every great financial plan. These steps will help you make your financial goals a reality:
- Calculate expenses: Consult your bank statements and receipts to know exactly how much you are spending each month. Some intermittent expenses can be tricky, such as insurance payments. To get an accurate picture, calculate the average expenditure for 6 to 12 months.
- Determine your income: Once you know the amount of money that keeps you afloat, determine your income. Any extra funds such as cash gifts and sale of items can be added up to the regular salary. Other income sources may include child support and rental income.
- Set savings goals: Subtract your monthly expenses from your income. If you are making more than the expenditure, use this amount to pay off debt. However, if the expenditure exceeds the income, it’s time to do some cutting and save more so as not to fall into debt.
- Record spending and track progress: Recording all your expenses and income will ensure that you stay on top of your budget. It will be easier to resist careless spending. Furthermore, it is satisfying and motivating when you have met a savings goal.
- Be realistic: Stick to your budget and know your limits. It is okay to break the budget occasionally as long as you can get back on track quickly.
How to Make a Personal Budget
A personal budget is an itemized summary of the income and expenses of a household for a period of time. Although the word, “budget,” in a household setting has negatively become synonymous with restricted spending and a lot of hassle, it actually means more efficient spending.
A personal budget will help you put aside necessary expenditures such as house payments while practicing discretionary spending on entertainment. A household budget may not be the most exciting activity for many, yet it is vital for keeping your house in order.
You might spend less in one area and save for larger future purchases or set aside money for a “rainy day.” Create a list of all the expected expenses within a month. These could include car payments, auto insurance, groceries, entertainment, and student loans.
The two categories of monthly household expenses include:
Fixed expenses are those that are necessary as a way of your living and stay relatively the same each month. They include trash pickup, internet service, and mortgage.
Variable expenses are bound to change from month to month. They include items such as gasoline, eating out, and gifts.
Importance of a Personal Budget
Others may feel they are too poor to budget or they may simply have other excuses. On the contrary, knowing how to budget money is essential for people from all walks of life. Here are five things that will make you see personal budgeting in a new light:
- Budget stops overspending: Lack of a plan almost always results in overspending. This limits your spending power in the future and, sadly, results in the stress of paying for the rising cost of gas. This can be significantly reduced when your paycheck is already planned.
- Budgeting helps you reach your goals: Financial goals may vary, ranging from getting out of debt to starting a business. Your budget helps you prioritize your spending and ensure that you achieve these goals.
- A budget helps you save money: Once you have assigned your money to do certain things, you will automatically save or invest each month. This is a stepping stone towards building wealth, which is what financial freedom is all about.
- It helps you stop worrying: A personal budget is not about restricting your happiness. A personal budget is about opening up opportunities for using money and gaining more control of your life. You get to decide how much you will spend in each category, and know when to stop after running out of money.
- It helps you be flexible: As long as you know how to budget, you can adjust the amount spent in each category every month. Thus, you can adjust so that you do not overspend and are not forced to touch the money set aside for savings.
- It helps you be in control: As long as you know how to budget, you can track your spending and know when to stop. It gives you a plan that is easy to follow and prepares you for the future.
- It is simple: managing money gets a whole lot easier when you can track all your expenditures and savings.
Do You Know the 50/30/20 Rule?
Experts recommend a personal budget where you:
- spend 50% of your income on necessities
- no more than 30% on wants
- 20% on savings and debt repayment
The simplicity of this plan enables manageable debt and gives you room to indulge occasionally.
Your needs, which is 50% of your income after tax deduction, include basic utilities, transportation, insurance, groceries, and housing. If your essentials pass the 50% mark, you may have to revisit your wants. Choose a better cell phone plan or refinance your loans.
Twenty percent of your savings should be put away for unexpected events. You may start with $500 to cover small emergencies. This is also a good time to work on getting rid of your toxic debt, such as high-interest credit cards. You can then save for retirement.
Thirty percent of your income should cater to your wants. Sometimes differentiating wants from needs can be difficult. However, needs are essential for survival while wants include dinners, travel, and entertainment or extracurriculars.
Personal budgeting will also allow you space to pay for unexpected expenses. These proportions may appear a bit strange but they help you get your finances on track.
The Envelope Budgeting System—How it Works
This is a very tangible system which requires discipline.
Get various envelopes and write the category on top of each. After each paycheck, insert the budgeted amount of cash in the envelopes (or in a bank account for better security). Once you have spent all the cash in a category, you cannot spend any more in that category.
If after all expenditures you still have some money left in the envelopes, use it to pay your debts or put into savings.
Although the system may appear to be a bit confusing, here are some advantages:
- It works
- It helps you to be disciplined when it comes to handling cash
- It is one of the best approaches to handling emergencies
- There are no overdraft charges, as there is no bank involved
- There is less wasteful spending because you think through every purchase
- You cannot miss a payment since all payments are upfront.
When using the envelope system, it is wise to deal with categories you mostly use. You might label an envelope and realize that you rarely use it. It is wasteful to budget to a category you don’t overspend in.