Some people don’t want to think about budgeting because it implies that they can no longer spend money and eat delicious food at restaurants. However, this is a common misconception surrounding the concept of budgeting. The purpose of budgeting is to show how much money you’ve been earning or accumulating, and to evaluate how much you’ve been spending.
If you want to become a financially responsible adult, budgeting and working within your budget are incredibly important. You’ll thank yourself in the long run because budgeting helps you make the most out of your money. It doesn’t matter what kind of economic standing you may have or whether you’re a teenager or a working adult, everyone—literally everyone—can benefit from creating and strictly committing to a budget.
How to Choose a Budgeting System
As you may or may not know, there are different budgeting systems you can choose from—four, to be exact. Choose the system that works the best for you and your needs, especially since each one utilizes different techniques.
Zero-Based Budgeting System
Dave Ramsey, a well-known financial personality, recommends the use of his zero-based budgeting system. In this system, you have to pre-assign all of your money during the start of the month and separate them using envelopes.
Notebook and Pen
This system is perhaps one of the oldest and most basic forms of budgeting you could possibly do. It’s a popular method because it’s the least expensive option. Using just a notebook and pen, write down your different sources of income as well as all the expenses and purchases you’ve made. If they balance, then you shouldn’t have anything to worry about.
Financial Software
If you’re a tech-savvy individual who’s fond of using computers and other devices, you can also make use of financial software programs that can help do the job for you.
Spreadsheet
Another popular method is to type in your income and expenses on spreadsheet software, the most popular being Microsoft Excel. If you don’t want to create your own worksheet, a quick Google search will show you thousands of Excel budgeting worksheet samples that you can download and use for free. Not only that, but Excel can also automatically make the calculations for you so you don’t have to whip out your calculator.
Online Software
Similar to the previous point, there are countless free web-based software programs you can use to make budgeting so much easier for you. For instance, there are programs like Mint.com or Manilla wherein you can create and categorize your expenses, track how much you’re actually spending, and more. This gives you an idea about where your money is going, and what you can do to cut back on expenses.
Steps to Create a Budget
Believe it or not, but budget is more complex than you think. For starters, there are different steps you need to follow first before you can successfully budget your finances
Set What Kind of Goals You Want to Achieve
First thing’s first: you need to decide what kind of financial goal you have. There are two types—immediate or long-range—and it’s important to know the difference. Immediate goals mean that you’re planning to use your money today or as soon as possible. On the other hand, long-range goals mean that you want to save and spend for a long time to come.
Both types are important, and in fact, they even complement each other. So, for starters, you need to know which goal you want to apply to wants and which one to apply to needs. From there, you can start to prioritize your financial goals.
For immediate goals, you have to consider the current expenses you have. These would include your rent or mortgage, utility bills, food, household supplies, loan payments, childcare, and anything else that falls under this category.
Then, you move on to secondary goals, otherwise known as discretionary items. These include vacations, eating out at restaurants, non-essential items, subscriptions, and more. Last but not least, your long-range goals include investments, donations, retirement savings, and others.
Evaluate Your Income and Expenses
Once you’ve realized what your financial goals are, it’s time to make a plan that will help you reach these goals. In order to do so, you need to assess not only your income but your expenses as well. Most households—or even individuals—tend to budget on a monthly basis because bills typically have a monthly schedule.
Start by creating a list containing all your income sources in a month. This should include any bonuses you receive regularly, your salary after taxes have been deducted, alimony or child support payments, etc. It’s okay to use an estimate if you’re not sure of the exact amount. Then, add all the numbers together, the total of which is your monthly income.
Then, list down all your expenses, which are usually categorized into three: discretionary expenses, fixed committed expenses, and variable committed expenses.
Analyze How Much You’re Spending
The main goal of budgeting is to ensure that your expenses don’t surpass your monthly income. If you’re spending more than you’re making money, then you should definitely make some adjustments to your spending habits. Of course, this doesn’t necessarily mean that you should stop spending on non-essentials altogether, but you do need to look at your list of expenses and decide which one you’re willing to cut back on.
Refer Back to Your Initial Budget
After monitoring your income and expenses for a month or more, you’ll come to realize that there are more areas that need adjusting. After all, it’s possible that your estimates from your initial listing weren’t accurate, or perhaps you forgot to list some other expenses like vet bills or repairs. When this happens, simply make the necessary adjustments again.
Commit to the Budget Plan You Have Made
Of course, once you’ve worked out all the kinks in your budget plan, you must follow it. It might seem like a hassle right now, but you need to discipline yourself and start budgeting as soon as possible if you want a financially sound future.
How to Manage Your Budget During Unexpected Circumstances
When it comes to budgeting, it’s important to keep in mind that emergencies happen. So, you need to set aside an emergency fund for yourself or your family. You can start simple, like saving $50 a week. If you commit to doing this, you could have $2,600 within just one year. When something unexpected happens, you can use the money from your emergency fund instead of completely breaking your budget plan.
Conclusion
Budgeting doesn’t have to be difficult, although it will seem like it is at first. As long as you start slow and follow the steps above, you’ll become a budgeting pro in no time.