Budgeting is as important to personal finance as a floor plan is to interior design. It gives an approximate idea of how your expenses should look like. When followed religiously, budgeting can give you several benefits like giving you more control over your money and eliminate unnecessary expenses.
To some of you, budgeting may seem restrictive and even daunting. However, if you can cross the initial mental block, you will realize how easy it is. In its simplest form, it is as easy as the math in primary school.
Budgeting will make you more aware of your finances and help you fight the vicious circle of debt. It will teach you to live within your means and also save for your emergency and retirement funds.
Here are the simple steps that can help you in creating a monthly budget for your needs.
Know your current status
If you don’t know how to get started, you can start by reviewing your financial health. Determine the amount of debt if you have any. Write down your financial goals for more clarity. Some examples of financial goals are saving down-payment for buying a house, saving for a vacation or to start a business. Make it a point to write them down instead of making mental notes. This process will give you more clarity about your financials.
Determine your income
Does your income change month on month? Different variables like overtime and tax can cause a variation in your take-home salary. If you belong to this category, you can average your past months’ income to know an exact amount for the purpose of budgeting. The simplest method is to use last month’s income as a benchmark. This is the first step to follow if you want to stop living paycheck to paycheck.
- Pay yourself first – The first step when you receive your income is to immediately set aside your savings. Your financial goals can help in determining your savings pools. If you are just starting and don’t have any financial goals as such, start by creating an emergency fund. This step will help in changing your focus from spending to saving. You can even automate this step by registering for 401(k), IRA or simply transferring a dedicated amount to a different bank account on the day you normally receive your income.
- Pick a budgeting system – This is the most crucial step as it will determine how you spend your money. Here are the different systems that you can opt for.
The 50/30/20 budget – This is a method that allows you to pay your debt, pay for your regular expenses and also plan for your future. If you follow this method, you can spend 50% on the basic necessities, 30% on your needs and aspirations and save the remaining 20%.
- Envelope system – To follow this system, you will have to allocate an approximate number to different expense categories. You may have to look at your previous months’ bills to arrive at the exact figures. Your expense categories could include rent, utility bills, food, gas, shopping, etc. After you have allocated the amounts, you can make different envelopes for each category. For the most disciplined approach, you can fill each envelope with cash and use them while paying for your expenses.
The Zero-based budget – This method is for the meticulous people out there. It is the system in which you take every dollar and dedicate it to a specific purpose. At the end of the month, your income must tally with the total of your expenses. This method will ensure that you know where every single penny from your income is going.
Review your budget
After you have spent a month on a budget, it is time to review your performance. You need to assess if you stayed within your limit or ended up spending more than you had intended. Depending upon your performance, you may want to make the necessary adjustments. Don’t worry if your budget fell flat in your first trial. With practice, you will able to fine-tune it to suit your needs. A determined mindset is what you will need to stay on the course.