Creating a budget is the simplest method you can track your expenses and money habits. You can use the insights earned from budgets to rectify unhealthy money habits, calculate net income and avoid unnecessary expenses. Having a budget allows you to plan how much you will save and invest each month. Making a budget may not be the most exciting thing you look forward to, but it plays a significant role in keeping your finances in order. Making a budget doesn’t mean that you have to deprive yourself of the things you need or that you have to aggressively cut down on spending. But it offers guidance on what you could do to make your financial goals a reality faster. Here are the steps to take to make a budget that works for you:
Calculate the expected income that you bring home every month. You may be someone who works the regular 9 to 5 job. In that case, your income is the take-home salary after tax deduction. If you are a freelancer or business owner, you might have several different streams of income. Record all your income and calculate the net income from all the sources. The basic rule for any successful budget is that the expenses should never exceed the income.
The second step in creating your budget is determining your fixed and variable expenses. List down all the expenses you have made in the month and categorize them into non-negotiable and negotiable expenses. Some of the common expenses are Utility bills, Grocery bills, Entertainment, Car payments, Mortgage, Rent, Insurance, Car payments, Child loans, Vacation, Staycation, Savings, etc. Make use of bank and credit card statements, bills, and other receipts to identify all your spending. After listing, categorize to identify fixed or non-negotiable expenses. This classification widely depends on the lifestyle you have. Some of the common fixed spendings are rent or mortgage payments, utility bills, etc. Some of the common variable expenses are Groceries, Gifts, Entertainment, Take outs, etc. Estimate how much you might need for the variable expenses.
Analyze your Budget:
When you have written down your income and estimated expenses, total your income and expenses separately to find out whether the expenses exceed the income. Ideally, you should have extra money to put towards investments and other financial goals such as paying off a debt, retirement fund, or vacation funds. However, if your expenses exceed your income, it means that you are overspending and need to rectify your money habits. Look for areas where you can cut your expenses. This is where your personal preferences come to play. The idea is not to deprive yourself of anything that makes you happy but to systematically allocate the budget so that you can enjoy your money without overspending. Many financial books offer advice such as cutting down your daily caffeine intake, but if coffee is non-negotiable for you, try to cut down on shopping a little bit. Another method to increase your excess amount is to take a higher-paying job or have a side hustle.