The Easy Guide to Budgeting
Budgeting feels restrictive and even unbearable when you feel as though you always to forgo a favorite treat or a night out with your friends. After all, we are a consumer nation always bombarded with ads urging us to spend money nearly everywhere we go. You can quickly lose track of your money if you don’t have a reasonable budget. Learning how to budget can be a daunting task, especially if you are the type of person who hates spreadsheets.
Additionally, many people think that they have to deprive themselves if they want to maintain a smart budget. However, you can allow yourself some fun just within the background of your entire budget. Creating and maintaining a budget is the foundation for managing money. Your financial situation doesn’t matter; you should have a budget if you want to manage your finances well. It is the first step to financial peace.
A budget is an approximation of income and expenses for a specific period with selected categories. It is an estimate of how much money you will make and spend over a specified period. A budget can help you get out of debt, save for your kids’ college education, pay off your mortgage, or invest.
No matter your end-game, a budget can help you manage your money.
How to Create and Use a Budget
Everyone has goals; you might want to save for retirement, pay off your debt, or afford that luxury vacation. Getting control of your budget can help you achieve your goals. However, the first step is to know how to create a budget.
1. List Your Income and Expenses
The first step to creating a budget is to identify your income and expenses. Your goal is to know exactly how much you spend each month. You can estimate your costs by checking your bank statements, receipts, and your financial files.
You can easily overvalue what you can afford when calculating your total salary. Make sure you use your after-tax when creating a budget. After determining the after-tax, list all your expenses, including your regular bills like electricity and mortgage as well as you irregular bills like insurance or quarterly payments. After that, total your other costs like food and clothes. Remember to account for every dollar.
There are three major types of expenses in a budget, namely:
- Fixed expenses – These are expenses that do not change over time. They include expenses like utility bills, mortgage or rent repayments and loan payments. You have very little control over this type of expense. These payments happen at regular and predictable intervals, usually monthly. Make sure you include all fixed expenses.
- Variable expenses – These are costs that come up throughout the year like groceries, gifts, vet bills, and others. These expenses may require you to reach out for your credit card if you have an unrealistic budget. Make sure to save for this type of costs.
- Discretionary expenses – These are costs that can be influenced by your behaviors. Discretionary expenses include food, clothing, and entertainment. Budgeting for this type of expenses requires you to know where your money goes after paying your fixed and variable expenses.
Separating your budget into these three categories will help you manage your money. Some expenses might fit into various groups; whenever this happens, list the expense in a category that you feel the cost belongs in your budget.
2. Pick a Budgeting Method and Track Cash Flow
There are various types of budgeting techniques. All these systems are designed to help you understand and assess your financial bond. Different methods work differently for different people. A budgeting method that worked best for your neighbor might not work for you; we all have diverse needs. Here are four budgeting methods that you can use to budget and track your cash flow:
Pen and Paper
Nowadays, many people opt for computer budgeting, but the old-fashioned pen and paper approach may work better for some people. This method is best for you if you are not comfortable with computer software. You need to list down your expenses and track the costs for some months. By budgeting using a pen and paper, you will be able to minimize the variances between your predictable expenditure and your actual expenditure.
No skill required
There is no surefire result
WHO IT’S BEST FOR
Computer reluctant people
If you don’t like using the pen and paper method, you can use the basic free software like Microsoft Excel to create a worksheet. You can use this worksheet to guide you pay your bills, save for retirement, and keep your finances in line.
Higher user approval
Easy to review
Needs skills to learn the syntax
WHO IT’S BEST FOR
Envelopes and Cash
This is a simple way of saving money and paying bills. You have to set aside your cash in envelopes and check how much money you have in each budget category every month. This method enables you to stay in touch with your spending habits. Once the envelope is empty, you can’t spend from another budget category until your next paycheck refills the envelope.
Has spending limits
Can be used as emergency funds
No skills required
Hard to get started
Tough to get the entire family on board
WHO IT’S BEST FOR
Technology reluctant people
Personal Finance Software/App
If you are not interested in envelopes and cash, you can use online software to automate your financial tracking. Software like Personal Capital and Mint.com can help you track your spending within a variety of categories.
Easy to set up
Real-time notifications and bill reminders
Long term visibility
No spending limits
WHO IT’S BEST FOR
A budgeting app can help you manage your finances. Make sure you review the budgeting method you choose before using it. Every method has its pros and cons, depending on your preferences. Decide the one that will work best for you; you can also combine the approaches.
3. Adjust Income and Spending to Meet Your Financial Goals
Finding the means to save money is the easiest way to achieve your financial goals. Thinking critically about your spending habits can help you see how you might be able to save on expenses. The best way to start saving money is the 50/30/20 budget formula. Dedicate 50% of your income to requirements, 30% to needs, and 20% to investments. In case one of the allocations exceeds these percentages, make modifications to fit the formula.
Additionally, you might use the zero-dollar budget, where your income minus your expenses equal zero. All you need to do is to make sure that your expenses match your monthly salary and every dollar gets a function. This way, you will know exactly where every dollar goes.
Save money in the categories where you spend much. Look at your budget and decide on which categories you can save money by cutting your spending. Here are some choices that can help:
How to reduce spending
You can lower your regular fixed expenses by buying the most reliable car and living in a smaller house. You can also save money by cutting utility bills at home.
Treat your variable expenses like your fixed expenses. Give yourself a spending limit by budgeting what you will spend.
These are the expenses that you have control over. It is up to you to decide how much money you can set aside for your future. For every discretionary expense, plan a variety of spending instead of a fixed dollar amount; remember to consider seasonal changes and other external influences while planning your budget.
Keep track of every expense, and understand the difference between the types of expenses. Accepting the natural and regular seasonal differences in your expenses will assist you in being better prepared for them hence reducing the costs.
4. Keep Your Budget Flexible
The best budgeters are those who can keep their budgets flexible. The most significant challenge about budgeting is keeping up with the small day to day spending fluctuations. If you have some cash left in one category, use it for expenses where you are facing a deficit. The only rule to this is only to use the money set for investing. Additionally, the money should be used for another category only for emergency. This will play a great role in ensuring that there is no overspending. A flexible budget is based on your income, needs as well as your expenses. It is adjusted on how you spend over the year.
A flexible budget allows you to adjust your savings and spending based on your lifestyle. It not only ensures that you don’t fall into debt, but also helps you focus your spending based on what is significant to you. It takes time to get a personal budget right. Make purchases and pay bills monthly, and match it to any of your budget categories.
Once the total exceeds its limit, stop spending, and wait until the next paycheck. To gather more accurate data for your tracking efforts, be willing to make some adjustments in the few initial months. Your saving patterns will then allow you to save for short and long term goals.
Expert Q&A Interview: Tips for Successful Budgeting
How can a person set reasonable budgeting expectations for themselves?
There are a few things people can do to set realistic budget expectations for themselves:
- Categorize your expenses. Take a look at the last six months and see where your money goes. Create a list of all the main costs. Break down your expenses into fixed, variable, and discretionary. The key to a realistic budget is a thorough calculation of the expenses. Don’t forget to factor unplanned expenses in your budget. Be honest with yourself when listing your expenditures.
- List your cash flow. Your cash flow statement measures your cash inflows as well as the outflows. Your inflow generally includes salaries, dividends from investments, or anything that brings money. An outflow represents all the expenses regardless of the size.
- Check the last few months. Look at the previous six months of spending and decide where your cash inflows and outflows as well as your spending habits.
- Set up a line for savings. Save 20% of your income. Spend less and save more. Build more amounts for both short term and long term goals and make it a permanent part of your budget.
- Budget for inflation. Inflation affects the items you buy regularly. Make sure to set budget line items for things that are likely to be affected by inflation.
What are the best ways to cut back on unnecessary spending?
The best way to save money is by cutting back on pointless spending. There are also many ways to reduce unnecessary spending; you can cut down on entertainment, and spend less on food and drinks by using coupons whenever needed. The other step is to limit how much cash you carry and remember to always make a list before going shopping. Stick to your list and avoid impulse buying. Buy just what is needed. As you sit down and plan a budget with your partner, spend time together, and see how you can manage your finances well.
What are some common pitfalls to budgeting?
One common mistake people make when budgeting is expecting everything to fall into place right away. You should always be patient with yourself as you navigate all the challenges of personal finance. Don’t strive for immediate satisfaction. To be financially successful, you will need to work hard and persevere.
The next common pitfall is making mathematical errors in your budget. If you identify an error in your budget, take time and concentrate on fixing it. Nobody is perfect, and we all make mistakes.
It’s understandable to be upset with a partner who is addicted to shopping; however, try to understand and be positive in dealing with problems. The key is communication. Communicate with your spouse and be sure to mention how overspending will affect both of you financially.
How should someone prioritize what they spend money on (e.g. debt versus savings)?
The answer to either save or paying off your debts first depends on various factors, including the interest rate on your debts and if you have an emergency. If you have high-interest loans from credit banks, the priority should be paying them off before they start accumulating. On the other hand, you can prioritize saving when you don’t have any cash set aside or emergency funds.
America Saves – This is a nonprofit campaign by the CFA (Consumer Federation of America) which dedicates most of its time and resources to helping people save money and build wealth.
U.S. Department of Education – Budgeting tips from this branch of the government enable students to learn more about keeping track of both income and expenses.
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