Creating a Budget
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You don’t need to earn a big salary to meet your financial goals. What you need are better money management skills. Becoming better with your budgeting skills will do wonders for your money problems. Whether you’re in debt, trying to save up for raining days, or just want to know where your money is going to each month, creating a budget is the solution.
What is a Budget?
We simply define a budget as a summary of expenses and income for a specified time. A typical personal or household budget is for a month.
Creating a budget not only helps you keep track of expenses and incomes at the moment, but it also serves as a great financial planning tool. By analyzing your spending patterns, you can always adjust the balance to achieve your financial goals.
If you haven’t planned a budget before, don’t worry, we detail the process in 6 simple steps. And in no time, you should be up and running;
6 Simple Steps in Creating a Budget
Before we begin proper, you need to decide where you’ll record down the items. You can use the traditional pen and paper to create a table and write down your expected expenses and incomes. Better still, you can find one of the numerous monthly budget templates online and download it. They will most likely be a spreadsheet.
What you need is a worksheet with designated columns for incomes and expenses in various forms. They usually come with some built-in formulas to help with basic math like addition and subtraction to arrive at your budget.
STEP-I: Record all Sources of Income
The very first thing you need to do is to record all the sources of income you have and the amount of money that is coming in. Now, we can classify your income into two groups. For your regular salary income, taxes are automatically deducted and this is your net income. As for your side gigs or income got from freelancing you’ll need to make the necessary deductions such as taxes and social security to arrive at the net income. Your net income is the true amount you have to spend.
STEP-II: Track Your Expenses For a Month
Here, you need to keep a record for two types of expenses, variable and fixed. Firstly, begin by listing all those expenses which stay the same every month. The following should be under the column labelled fixed: mortgage, car payments, credit card payments, and utility bills for electricity, internet/cable services, waste pickup, etc. These are essential expenses and you can hardly have any room to cut corners here. Also, if you have committed a certain amount to pay off debt, include it under fixed expenses.
Moving on, you should have another column under expense for variable expenses – those that varies from month to month. Things like groceries, gas, entertainment, gifts, and so on, fall under variable expenses. You may want to check your spending history to make sure you’re not leaving any item out.
STEP-III: Total Both Your Monthly Income and Expenses
Sum up the columns we have so far. Keep a subtotal for fixed and variable expenses separately. What you want to see is that monthly income exceeds your monthly expenses. We will consider how this excess fits into your overall financial goals in the next step.
If your expense is more than your income for the month, you’re living above your means and some adjustments need to be made to your spending habit.
STEP IV: Decide On Your Goals
Decide on all you wish to achieve money-wise. This should include both long and short term financial goals. Some long term plans that you want to consider include saving for your retirement, whole life policies, and your children’s education. You might want to adopt the 50-30-20 budgeting philosophy if your income is higher than expenses. Essentially, your needs take 50% of the budget, want 30%, and savings and debt take up the remaining 20%.
STEP V: Make Adjustments Where Applicable
Looking at your columns, the items under variable expenses are what you have greater control over, compared to your fixed expenses and net income. If your expenses are higher than income, you may need to do away with some of your wants for the month. Perhaps, you can live without cable TV for now, or ditch that expensive restaurant. Essentially, you need to look for areas where you can cut corners. It is pertinent for you to do this to avoid being plunged into debt.
If you still have excess in the expense department, it’s time to take a closer look at your fixed expenses. Saving some extra cost here can prove difficult but not impossible. You need an apartment but check, do you have to pay so much for it? Can you get a better, cheaper deal elsewhere? Dig deep and you will find some answers.
STEP VI: Constantly Review Your Budget
Regularly review your budget each month to evaluate and monitor your expenses. Look for patterns in your spending habit. Focus on each category or column alone and establish areas where there are irregular spikes in spending. Don’t forget your goals and how they can change depending on your earnings and expenses, both in the short, medium, and long term.
Frequently Asked Questions