Having control over your money and not the other way around is very important to your financial health. In fact, it determines the way you live, the kind of financial decisions you make, what sort of holidays you can go on, whether you can retire early and so on.
A budget is one of the most important tools for understanding your cash flow and when used right, managing and having control over your money. Quickly, what is a budget? A budget in simple words is a financial tool that displays your income and expenses. A budget enables you plan for the income you’re expecting in the nearest future, matching it with the expenses you’re expecting to make in the same time frame. This gives you some knowledge and control over what your money does and how it is spent.
So how do you start out creating a budget? There are guidelines like THE 50/30/20 RULE TO BUDGETING that help you budget. Here is a breakdown of the guideline in 5 very simple steps.
Step 1. Know your Take Home Income
First, figure out how much your take home is at the end of the month plus bonuses and profit from side business. For some it is a fixed amount/salary while for others it fluctuates. To know more about budgeting on an irregular income, see HOW TO BUDGET ON AN IRREGULAR INCOME. Having an ‘idea’ of your income or just imagining a superficial number does not work when setting a budget because you cannot or rather should not, budget on an imaginary number. When you’ve figured out your take home income, put it down.
Step 2. Figure out your essential expenses and subtract that again from your take home
It is important to work with your essential expenses first so you don’t get carried away. There will always be things to buy and experiences you’d like to spend on which are easy ways to drain your money. A budget helps you make the best use of your money.
So, make a list of your essentials expense or expenses you must make. These expenses are either necessary for your survival or are of priority to you. Generally, these may include rent, utility bills, food, transportation costs, the children’s school fees etc.
Step 3. Decide a percentage for Savings/investment and subtract it from your take home
One of the great things about using a budget is it helps you develop good financial habits. One of which is saving/ investing. After you have figured out how much you will be taking home at the end of the month, decide how much percentage you want to give to savings/investment. It could be 5%, 10%, 20%, etc. depending on your financial responsibilities and personal preference.
Ideally, from the 50/30/20 RULE TO BUDGETING, you should be able to budget 20% of your income for saving or investing. Subtract this percentage from your take home income.
Step 4. Figure out and subtract the Nice-to-haves from your income (Discretionary Expenses)
This is the part meant for the other expenses that are nice to have which may include eating out at a new restaurant, buying new outfits, taking a vacation, paying down debt etc. Don’t go overboard with it though. Better yet, make a list of all the nice things you would love to have or do. Also make a list of their estimate costs. Figure out if what is left from your income at this point can cover the costs. Otherwise, prioritize your list and strike some things off for next time.
After you have come up with your Nice-to-Have expenses, subtract them yet again from your take home income.
Step 5. Compare and Choose a Method to Practice your budget
Figure how much you spend each month currently. You can do this by looking through your bank statements and receipts. You might find yourself saying ‘Wow, I paid this much? I don’t even remember buying that.’ Now compare the way you spend with the way you should be spending. Do you need to cut costs somewhere? Are you spending more than you earn?
If you notice, what you have done is to divide your money into different sections to make sure that you are making the best use of your hard-earned money. Another way to do this is with the 50/30/20 GUIDE TO BUDGETING. Now that you know how much you should be spending, choose a method of implementing your budget. Try the envelope method or try automating your expenses.
Many fail at keeping a budget because they fail to realize that a budget is flexible. It can be changed whether your income rises or falls. The important thing is to keep trying to figure out what works best for you and then continuously practice until it becomes a habit.
The RenMoney Blogger
RenMoney has got your back.