The Easy Guide to Budgeting

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.

Budget Worksheet

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.

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.

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.

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:

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.