The term “Budget” is as well known as the word “diet”.
A lot of people actually understand that both need careful attention, but they dislike the idea of both words.
Budgeting reminds a person of saving pennies, clipping coupons and mealtime consisting of instant ramen and cold leftovers.
Making a budget and following it actually might be one of those enabling tasks that we perform.
Creating a budget allows us to focus our attention on economic matters with precision enabling us to settle our debts, guard our credit, finance our retirement plans and save our money to purchase properties like cars and houses.
Budgets are the pleasant restraints that we need to allow us to live fully since it makes us capable of determining how much cash we are actually earning, where we spend it, where it will be allocated and when we have the very much appreciated excess money.
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Don’t worry, making a budget that’s simple to make sense of and (fairly) easy to follow is not as difficult as you thought, especially with so many great free budgeting apps that you can install on any device.
Below are five fast steps to help you start making the first budget that you can stick to:
What will I learn?
1. How much cash do you have coming in every month
Does this seem obvious?
But you might be amazed at the number of people who have an unclear idea of the very necessary budget component—the net income.
The initial phase in creating a budget that’s effective is to know how much money you expect per month.
Adding up all sources of income net of tax reveals the amount of money you will work around on gives an outline on how to adjust expenses, helps determine a realistic goal for saving money and prevents shortage of funds.
2. How much do you have to spend on bills every month
The second step is to determine how to fix the monthly expenditures. Expenses usually can be categorized into two- Fixed and Variable.
Knowing how these two are different is necessary.
Some expenses are often the same or only vary a little every month ( think of overhead costs such as payment for house rent or car amortization).
While fixed expenses can be decreased through longer term strategic selections, for the objective of creating a good budget, these fixed expenses are steady and certain.
If you’re a new graduate who is attempting to create your very first after-college budget, then you must keep in mind that you could be facing some new fixed expenses—something you didn’t have to deal with when you were a student.
Ensure that these are considered when you create your budget.
These new expenses could include:
- Student loan payments
- Health insurance
- Car insurance
Personal savings should be an important component of your fixed expenses classification.
Keep in mind that “paying yourself first” ( constantly putting money in your personal savings from your paycheck even before it gets to your checking account) is one of the most important parts of making wealth in the long run.
A lot of new budgeters commit the error of only putting what’s left of their paycheck into their savings—that’s if there’s something left of the paycheck—only after the expenses have been deducted from the net pay. But doing this is far from being strategic.
Plus it doesn’t help you prepare for your future since you are placing your future at the hands of all other things that you spend on.
Stash some cash away regardless of whether it’s just $15 or $20 a month.
Ensure that you have a certain amount or percentage allotted for savings. This amount will pile up more quickly than you imagined, will inspire more savings in the future, and be a leverage for the unplanned events that could happen in your life.
Keep saving even if you have saved sufficiently for the emergency funds.
Although you might want to reflect on dividing the cash intended for savings between regularly saving and settling some debts.
Check your credit cards, student loans and other debts that are under your name and start paying more for them using the highest interest rate.
Remember, that settling more debts now can help you conserve thousands of dollars in the long term.
As implied by the name, variable expenses are not fixed and are made up of expenses that you can control such as entertainment, clothing, and travel.
These expenses are usually the ones you will take out from your list when you’re cutting costs should you have higher monthly expenses compared to the income you make in a month.
3. Balance your budget
This is the most important part.
After determining how much cash flow and expenses – both variable and fixed – you have per month, knowing what to do will be simple.
Do the numbers add up?
If not, and you have more expenses than income, then it’s time to strategize.
These are questions you should mull over: “Which expenses can I cut?” or “How can I add more to my present income so I can meet my expenses and balance my budget?”.
If you have already adjusted your variable expenses but this too wasn’t able to resolve your budget shortage, then it’s time to look for other ways to cut down your fixed expenses.
Perhaps it’s time to look for a roommate whom you can split the rent and utilities with?
Or perhaps you can stop the subscription for cable TV or mobile phone and internet plans can be cut down.
Balancing income and expenses is the part that requires working hard, but this is the most valuable part.
When you get to make the figures work together, then you already have a clear outline of how to live within what you make and slowly get to your bigger financial targets.
4. Select your method
Once you have determined how to work the number, then you start selecting the best method in managing your cash to ensure that you stick to your budget every month.
There are a lot of budgeting tools, as well as free printable budgeting templates, like these free Google Sheets budget templets, available for those who need them. But in my personal experience, the most simple method is the best among them.
A lot of those who are just starting to budget have opted for low-tech and selected the variation of the envelope method.
This method allows budgeters to settle their fixed expenses with the use of checks or by online payment facilities, while the remaining money is withdrawn in cash.
Variable expenses are paid for in cash and are separated per budget and placed in different envelopes.
Each envelope has the name of the category expense (i.e. . Groceries, Gas, Entertainment, Gifts, etc.) plus the budget appropriated.
Whatever cash that will be used for every expense should be sourced only from the designated envelope (unless it can be sourced from another envelope from a different category), and when the cash is gone, then it’s finished.
This envelope method might come off as old school, but its widely used for its simplicity and its effectiveness.
For those who are new to budgeting, then note that there is added value in having the cash on hand since this will let you know the financial boundaries and excess in a concrete manner.
No need to experience those delays in check clearing or payments process. Either you have the cash on hand or not.
This way you can know in real time whether your expenditures and income are evening out.
5. Adjust if necessary, but stick with it
Note that the word Budget is more than a noun. It’s a verb- an action word. Complying with your budget and chosen method of sticking to it is just as needed as creating it, to begin with.
Keep in mind that there are no secret or unique tips for developing effective budgeting—it will take time, experience, practice and self-control.
If you make mistakes at the start and have spent more in a particular category, then don’t lose sleep over it, and promise to improve by next month.
Incorporating a fixed financial ceiling in your lifestyle has three benefits.
- First, it allows you to be financially sound which would guard your credit and cut down your stress level.
- Second, financial knowledge is created which can be used in both professional and personal life.
- And lastly, it will help in pushing your income to grow by illustrating the difference between a straight and first hand dealing with income and lifestyle.
It is really easy to make a budget, but the hard part is sticking to it. But if you can stick to it, the reward will be well worth it.