Budgets are valuable tools for prioritizing costs and learning how to control our income. Or all of us should learn how to create a budget. This will give us clear signs of how we spend and waste our money, as well as how financial and life goals are accomplished.
It’s a vital part of keeping your financial house in order even if making a budget does not sound like the most exciting activity. Although the word ‘budget’ is often associated with limited spending, to be efficient, a budget does not have to be restrictive.
Check out the following post to learn how you can make the most of your money without any financial knowledge and too many restrictions.
Why Should You Make a Budget?
There are a lot of reasons why we should know how to set up our budget:
You may often find yourself overspending each month by wasting money without thinking carefully about where everything goes. Overspending reduces your spending power in the future when debt payments have to be added to more and more of your revenue.
To help you decide when to avoid spending money more than needed, use your budget. If you know how to set up a budget, be sure that you are on an appropriate way to reach your goals. It also helps you to save more money.
Financial planning can be flexible. It is an effective financial instrument because it can help:
- manage expenses,
- minimize costs,
- prepare for future goals,
- plan for inexpedient emergencies, and
- list what you are spending and saving.
Throughout the month, you can switch money between categories when you need to. At first, it will probably seem complex to control your monthly budget. But you can save time, tension, and even money if you learn how to organize monthly bills by following these brilliant steps that follow.
6 Easy Steps How to Create a Budget
Now let’s look into the 6 simple steps that help you create a budget even if you don’t have any financial knowledge.
Step 1: Calculate Net Income
The first action to take is to measure your monthly salary. Start by listing your income sources. If you are self-employed or have some external sources of income, make sure you also report them.
As a monthly number, report this total income. Make sure all are accounted for every month, so you will have a reasonable starting point.
Step 2: List Monthly Fixed Expenses
List your monthly spending as the next step. Fixed expenses are those compulsory expenses that for each time you pay the same amount. Write down a list of all the planned costs over a month that you intend to spend. They can include:
- vehicle insurance,
- health insurance,
- subscriptions, or
- if you are a student, college savings.
You can also obtain any financial statement that you can, such as bank statements, utility bills, and any source of cost information. Include savings as fixed expenses you try to save a specific sum or pay off a certain amount of debt per month.
Step 3: List Monthly Variable Expenses
The next step is to list the monthly variable expenses. Variable costs are the sort that varies from month to month, for example:
- eating at restaurants, etc.
Take a look at the last 3-6 months of spending to identify the variable costs in your budget and identify which categories are stable and which are changing! Your variable costs are the categories that change and they can make or break your monthly budget.
A significant skill that will make you feel more financially prepared for whatever life throws at you is learning how to budget for unpredictable expenses. You’ll want to take out a sheet of paper to understand how much to budget for each of those expenses.
Note: You may have noted, that there seems to be more cash going out than you have documentation for. That’s because every family has “leakage” spending—the little items that are not accounted for but add up. Make sure to add a bit of extra money on that position, too.
Step 4: Set Financial Goals
Now it’s time to set the goals for the future. Financial decisions can be overwhelming. A significant part of getting yourself back on track is taking a moment to build financial goals and prepare for how you can accomplish them.
To properly plan your finances, you will decide how you will save and invest your money by establishing private short- or long-term goals. Better financial independence and stability will be enabled by this.
If you have correctly defined and recorded all your expenditures, the target will be to have the columns of income and expenditure equal. This ensures that all the money is paid for and a particular expenditure is budgeted for.
Here are a few examples of financial goals you could set for yourself:
- I want to spend no more than USD 200 per month on food.
- I want to spend no more than USD 50 per month on entertainment.
- I want to build a savings fund for emergencies of USD 5.000 until the end of the year.
- I want to invest USD 150 per month, e.g. in ETFs, P2P lending, or stocks.
- I want to pay off all of my debts within the next 24 months.
Many money issues arise because they don’t know specifically what they want to do with their money and therefore spend it randomly. The objectives you are looking for are straightforward and help you develop your strategy. After that, figuring out how you can accomplish your financial goals is an easy task.
Step 5: Make a Plan and Start Adjusting Your Expenses and Income
What you should do next is to make a plan and to start adjusting your expenses and income. To do so, add all of your expenses and see if you can meet your goals given that you continue the way you do now.
If your expenses are greater and you can’t meet your goals, you need to adjust. The easiest way to do so is to look for ways where your variable expenses can be minimized, such as:
- dining out less,
- drinking less alcohol,
- stop smoking,
- replacing expensive entertainment with cheaper or free options (e.g. movie night at home instead of going to the cinema) or
- reducing shopping expenses.
It should be easy to shave a few dollars in a few places to get you closer to your goals, as these expenditures are often unnecessary.
If your expenditures are well above your income or you have substantial debt, it might not be enough to decrease your variable expenses. To balance your budget, you will need to trim your fixed expenses and raise your revenue. Here are some examples:
- moving into a smaller apartment or get a flatmate,
- going for a cheaper car or using public transport,
- canceling your gym membership,
- canceling streaming subscriptions, or
- comparing insurance companies and see if you can find a cheaper one.
I know that the fixed costs are usually harder to reduce. However, they also make up most of your monthly expenses, which means there is a lot of saving potential. See if you can reduce your costs here at least for a while until you are back on track.
Bonus tip: Stick to a debit card or paying cash if you spend money on a day-to-day basis. Credit cards may be convenient but they are also dangerous. It’s too tempting to buy things that you actually don’t have the budget for. That can cause debt and throws you off your financial plan. So avoid using them whenever possible.
Step 6: Track Your Plan Regularly
Now you have set your goals, know how to get there, and are working on achieving them. However, you should monitor your plan regularly to stay on track and adjust if necessary.
Write down your daily or weekly expenditures in a diary, on your phone, or use an app, such as Wally or Mint. This may seem to be annoying at the beginning but it gives you valuable insights into your spending behavior and helps you a lot to control your money.
Also, set reminders to your calendar for the days when you sit down and check if you are still on track. For instance, you could use every first day of the month to check what happened to your finances in the last month. So 1st of July you block 2 hours in your schedule for sitting at your desk and checking your income and expenses of June, and so on.
As soon as you see that you’ve spent more than your goal, look for ways to adjust. For example:
- Could you cut down on a certain category of expenses this month?
- Could you sell clothing that you don’t wear anymore on eBay?
- Could you make an additional income by using certain smartphone apps?
Setting goals alone is not enough. You need to monitor them regularly if you want to be successful with them in the long run.
Additional Budgeting Tips
- If you have cash flow problems because you are only paid once a month, break the payment by weeks, and keep the cash you intended to spend in a different account in the remaining weeks before you need it.
- Pay with a credit card only if you have the money at the end of the month to pay it off.
- Customize your budget from time to time if you think your expenditures are overestimated or underestimated.
- Keep an eye on large costs, such as insurance premiums, that occur only every few months.
- Using budgeting hacks like going to a cash-only budget if you plan to overspend on those categories.
- To strengthen your financial literacy, take time to learn other financial skills and make your money work harder for you.
- Technology is on your side when it comes to budgeting. Some apps can walk you through the budget setup process, then monitor your progress. An app can monitor your spending and send the data to you instead of manually reviewing your spending to make sure you remain on track.
- You Need a Budget (YNAB), which links to all your financial accounts to help you track your expenses, is one of our favorite budgeting apps. With target tracking and financial reports showing you your success, it can suddenly become fun to budget! You can access your budget from any of your devices and you will not fear overspending ever again with YNAB’s “four rules” that give every dollar in your budget work.
Stop Wasting Your Money with the Right Budget
Facing financial concerns is what you will experience if you don’t balance your budget and spend more than you earn. Many people do not realize they spend more than they earn and every year they slowly sink deeper into debt.
Learning how to set up a budget and tracking all your expenses to see where your money is going is the best way to plan your money. It’s not the easiest thing in the world to live on a budget but it can be a fantastic alternative to thinking about how you can pay for your expenses.
Budgeting helps you to build a spending plan for your income; it means that for the things that are important to you, you will still have money. You can also be kept out of debt by adopting a budget. To ensure that you are staying on track, it is important to review your budget regularly.
All in all, creating a budget is a necessary step to take to learn how to plan and smartly use your money.