Typically a boring topic to cover, budgeting is a skill that is essential to have and to master. Contrary to popular belief, creating a budget is not a hard task to do.
A budget is a tool that anyone, in any walk of life, can use in order to track where one’s money went and where it is supposed to go. It can be written in a small notebook, a scratch paper or in a budget tracking app depending on your preference.
The goal of a budget is to spend wisely. By establishing spending limits and segregating income into specific jobs like savings, investments, bills and emergency funds, you will never have to worry nor be confused as to where your money went; because it is a known fact that money, just like time, flies.
Preparing a budget
Creating a budget is an easy 4-step process.
First, calculate your total monthly income. Find the sum of every source of cash your money-making activities bring in.
Second, make a list of all your expenses per month. Include the fixed expenses like rent, mortgages or insurance payments as well as variable expenses like eating out and grocery trips. Make sure to include everything that concerns the idea of money coming out of your wallet and into someone else’s hands; all of those are expenses.
Next would be setting financial goals. This is the carrot to be placed in front of you to serve as motivation. It may be a new house, a car, a trip abroad or an increase in investments and savings.
For financial goals, it is advised to make them “SMART”, meaning specific, measurable, achievable, realistic and time-bound. You will be only one who can gauge whether the goals you are setting are achievable or merely wishful thinking. The more realistic they are, the more likely you will work to accomplish them.
Lastly, put the first three steps all together to form your budget. Your income should be greater than expenses. If not, look at areas within your expenses, usually eating out, and decrease that amount.
A good rule of thumb in allocating your income for a budget would be the 50/30/20 rule. This puts 50% of your income towards necessities like your fixed expenses, 20% towards financial goals and savings and 30% to variable expenses like dining and entertainment. Increasing the 20% will increase your financial stability and security.
Sticking to a budget
Having a budget lets you take control of your finances. If you can see a detailed report of your monthly spending and earnings and put that side by side with your dreams and goals, you have the power to make the necessary changes in order to achieve those goals.
E-learning portal Khan Academy suggests to regularly review your budget to make sure you are still on track. This can be done every 1st of the month after you have computed for the previous month.
It may take some getting used to, but once you’ve got the habit of writing down everything you spend and earn, your budget will serve as a guide in keeping you away from debt, providing you the things you need and treating you with the things you want.