A step-by-step guide to create and use a budget
When looking for personal finance advice, how many times were you asked to plan a budget?
Almost every time. Such is the importance of making a budget. A personal or household budget is the first step to control spending and achieving your financial goals.
As Benjamin Franklin once infamously said, "if you fail to plan, you are planning to fail." Similarly, if you fail to make a budget, you will fail to achieve stability and will stay paycheck-to-paycheck.
No matter how handsome your income is, if it is not spent well and according to the plan, your financial stability will remain only a pipe dream.
What is a Personal Budget?
If you are wondering about what you call a personal or household budget, then here is its brief definition.
A personal budget is a track of your income and expenses for a defined period, usually one month.
It shows you how much money you need to run your house a month, how much you are earning and what is the discretionary spending - entertainment or eating out.
The word 'budget', often conceived as negative and restrictive, is a tool to assist you and put you in a better position for achieving stability and financial goals. It's also often utilized to help you reduce your debt.
Once you know what a budget is and why everyone must make it, it is time to address the actual concern for which you are here “How to make a personal budget?”
How to Make Your First Personal Budget?
Getting started with your first personal budget may seem complex, but this article will guide you through every step in the process.
We have compiled for you a 5-step guiding formula which is made especially for someone who has never made a budget in his life and wants a perfect shot in his first go. After all, if a budget is not complete, it is not a budget...right?
So, here are 5 steps which you must understand and apply to achieve more security and satisfaction in your financial matters.
Your First Budget in Five Simple Steps
1- Determine why you need a budget
Budgeting is always a great decision, but this can turn in no good if you do not have any specified goals. Whether you want to save more money for retirement or want to break the paycheck-to-paycheck cycle, a goal must be determined before making the budget.
Decide to have a budget for yourself and you are already half done with your financial worries. In fact, the University of Maryland research says numbers create an emotional investment, enhance motivation, and discourage cheating.
So, determine where you want to reach, involve numbers, and set your financial goals.
2- Calculate your earnings and current spending habits
A budget only works when you are honest about your income and expenses. So, if you want an effective budget, you must be willing to work with detail and accurate information about your earning and spending habits.
Start with how much money you make after the deduction of taxes each month. If your income is not fixed, using an average income will be okay, but the more accurate the better.
After reviewing income, break up your monthly spending into two buckets: Essential and Extra. Things like housing, transportation, utilities, and food will go in the essential bucket.
While dining out, vacation, entertainment, etc will go in extra bucket.
Make a list of all these things which are necessary, and which are extras. This will give you a holistic picture of where your earnings are going, so you can have better control.
3- Calculate the discrepancy between income and expenses
Once you know how much you earn and what are your spending habits, it is time to calculate their difference.
If your income is higher than your monthly spending, you are in good shape to save money and fulfil your financial goals.
But, if your expenses are more than your income, you are overspending and need some changes.
Adopting a "50-30-20" budgeting formula is deemed fit for most incomes. In this, 50 represents essential expenses or needs, 30 represents your wants and desires, and 20 indicates savings and debt repayment if any.
4- Adjust your budget
If your earning is more than your expenses, you are good to go. But if the situation is the opposite, you need to find areas where you can cut your expenses.
In the list which you made for your monthly spending of essential and extra items, look for the ones you can eliminate or reduce.
This can include eating out or cancelling your gym membership, to save some extra money.
If your expenses are far above your income, reducing your variable expenses may not be enough.
You may need to reduce some of your essential spendings or increase your income to balance the equation.
Increasing your income can be difficult, but that's exactly why this blog was created to help you with!
5- Setup a budget monthly review
It is important to make a budget, but it is equally important to stick with it and track its progress; otherwise, all the efforts will go in vain.
According to stats, two-third of the people do not follow the budget once they make it, and you cannot be one of them if you are serious to achieve your goals.
Also, remember that every month will not be the same, you will need to change your budget and adjust over time.
The unexpected expenses, overspending, or leftovers can unbalance the equation of your budget. So be ready to review it once you make it.
Pro Tip: If you are a type of person who lacks confidence in following a strict budget, an envelope strategy can be handy for you.
Make a separate envelope for every spending category and put in it the cash you intend to spend. When envelopes become empty, you will have to stop spending in that category.
These 5 steps are guiding principles on how to save money and cut spending with a personal or household budget. Start this process today and you will see a dramatic improvement not only in your financial life but also in personal and social life.
Now, it's time to create your budget. Use the steps above to get a better understanding of your specific income vs expenses and you'll be well on your way to having better control over your finances.
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Credit: Ahsan Malyk