Budgeting is a critical element of your financial journey. A well-crafted budget gives you better control of your finances. Also, budgeting makes it easier for you to save money for your financial goals. Just because budgeting may seem overwhelming, it does have to be complicated. The trick is to set up a simple and straightforward budget that works for you. This article provides a step-by-step guide that can help create a budget.
Understanding a Budget
First, we need to define the term budget. A budget is a financial plan that specifies how you intend to spend your money every month. It doesn’t necessarily mean a restriction on your spending. Instead, a budget reveals your net income and how you’ll spend your money.
Five Steps to Create a Budget
Set financial goals
Before you start preparing your budget, you’ll need to make a list of financial goals. The goals consist of a set of targets you want to achieve with your money. When setting the goals, identify what you want to accomplish in the near future (short-term goals) or further in the future (long-term goals). Your goals need to be realistic and have a connection to your abilities and skills.
Having goals is crucial in creating an adequate budget. The goals provide the motivation you need to commit to your budget. Establishing goals also ensures you attain your desired outcomes efficiently. It will be easier to cut your expenses if you understand you’re saving for a house.
Calculate your net monthly income
Once you have set your financial goals, you’re ready to get into the numbers. Start by calculating your net earnings for each month. The net monthly income includes the money you’ll get in that month after taxes or anything deducted from your salary.
When calculating your income, you’ll also need to consider any income from other sources, such as real estate or a side hustle. Focusing on your net income keeps you from overspending because you’ll plan for what is available. If you are self-employed and have an irregular income, look at your earnings for the last few months. Use the lowest monthly income as your budget line.
Calculate your Expenses
Now that you’ve determined your net income, it’s time to list and add up your expenses. Your mobile payment history and bank statement are helpful sources of your spending. Break down your costs into budget categories to clearly understand your spending. The following are some of the essential budget categories.
Housing
Food
Utilities
Clothing
Transportation
Saving
Insurance
Healthcare
Loan repayment
Recreation
Miscellaneous
List the specific expenses for each category. For instance, the utility budget category includes expenses like water, gas, electricity, and internet bills. Categorizing your expenses is super helpful. The budget categories help you identify your top spending and find opportunities to cut back on expenses.
If it’s your first time to create a budget, expect to encounter some challenges. The budget for variable expenses (those that fluctuate over time, such as gasoline, clothing, groceries, and transportation) might be hard to plan. Add up your spending for the past three months and divide by three for a good estimate of the variable expenses.
Make a plan
In this step, you’ll bring everything together. First, add up both variable and fixed expenses to have a sense of your total expenses. Subtract your expenses from the net income. Consider using the Zero-based budgeting method, which implies that the difference between your income and expenses should be zero.
So, every penny that you get has a purpose. With the zero-based budgeting method, you leave nothing to be irresponsibly spent on fancy things. If you end up with a negative figure, look for ways to cut your spending until the expenses and income even out.
The 50/30/20 budget rule provides an easy way to make a budget based on your obligations and needs. Based on this rule, savings should account for 20% of your budget. When formulating your budget plan, you might want to break down expenses between needs and wants. It would be best if you prioritize your needs before budgeting for your wants.
Make adjustments to your expenses
Once you’ve documented your plan, you’ll need to make appropriate adjustments on your adjustments on your expenses. Every month, reevaluate your budget and change as necessary. If your expenses exceed your monthly net income, you’ll need to cut your spending. Aim to cut the money spent on flexible expenses such as travel, entertainment, groceries, and household items. It is necessary to make adjustments to your budget to avoid getting into debt.
Budget reevaluation is also an opportunity to increase your savings. If you find disposable income, you can assign the money to specific budget categories. It is a good idea to use the leftover income to grow your savings.
Related: 10 Simple Ways to Save Money
What’s Next
Creating a budget doesn’t have to feel overwhelming. Refrain from viewing budgeting as a financial punishment. Remember, a budget gives you control of your money and future financial success. After making a budget, make sure you stick to it. Always ensure your spending stays within your budget. If you budget as a couple, ensure you have access to each other’s income and expenses.
