If you want a financial life where you don’t have to scrimp and save for every big purchase or worry about retirement, you need to learn how to make a budget. By making a budget, you’ll be able to track your spending and essential expenses to ensure you hit long-term financial targets.
Whether you want to go on holiday next year or save to buy your dream home in 10 years’ time. Budgeting is a life skill and you are better off learning the ins and outs of budgeting sooner rather than later.
And, the good news is that you don’t need to be a trained accountant or experienced money manager to create a solid budget. All you need to do is follow our easy steps and budgeting tips to get your personal finances under control.
Let’s get to the following commonly asked questions:
Before we dive into the details and get you sorted with a killer approach to budgeting, it’s important to understand what budgeting is and what it can help you achieve.
With a written budget, you can keep track of all of your expenses from your home loans and car loans to your payday shopping sprees. By taking note of everything you’re likely to spend in a given month and comparing that to the money you’ve got going into your bank accounts, it’s a lot easier to make good financial choices.
This can help you on your way to paying off debt or building wealth. In the shorter term, it will also alleviate any anxiety you might have about how much you’re spending and how far you can stretch your money. So, while it is undoubtedly not the most thrilling activity, it’s an essential part of keeping your finances in check now and in the future.
There are so many reasons why budgeting is important. For one thing, once you’ve tracked your spending for the month, it will be easier to spot bad spending habits and put a stop to them. For another, by listing the expenses you need to spend your money on, you’ll be in a much better position to decide what to do with the rest.
This stops you from overspending, which can leave you facing tight months and damage your credit scores to boot. So, before your money ever leaves your account, you’ll know how much you’re going to need to pay your bills, do your grocery shopping, and prepare for emergencies, and all without going over budget.
Creating a budget that is balanced or a ‘balanced budget’ is a good goal to aim for. This just means having the same amount of money coming out of your bank account as there is going in.
To put it another way, with a balanced budget, the income listed on your bank statements will be roughly equal to the money going out. To make that happen, you’ll need to plan ahead each month and plan well. If you do, you’ll always be in a secure financial situation.
Zero-based budgeting is a good technique to use if you want a balanced budget. It’s a way of planning your spending for the coming weeks by subtracting all expected monthly expenses from your income until it equals zero.
By allocating your outgoings in this way, all of the money you have coming in will be accounted for each month. This ensures that spending is always intentional.
It’s also an easy enough technique to put into practice if you have the right approach. However, we’re going to look at a simpler approach to budgeting that’s easier to tailor to your financial situation.
With a well-planned personal budget, you’ll be in a much stronger position to hit your financial goals in a smaller time frame. It doesn’t matter if the goal is a shorter-term splurge or it’s geared towards securing a happier retirement. By tracking your expenses, you’re sure to make smarter financial decisions that will help you get there.
A dedicated approach to budgeting also makes saving so much easier. As long as you set spending limits and a minimum savings amount for each month, you’ll be able to build up a good pot without letting other payments slide. In other words, a budget forces you to get on top of both your savings and debt repayment, as well as other essential expenses.
Important: Never forget that your budget doesn’t have to be static. You can revisit your monthly budget regularly and adjust your approach so that you can better meet your goals. It’s all about making better financial decisions and adapting them when circumstances change. Being able to do so and still live comfortably is the ultimate sign of financial health.
Before you start budgeting, there are several elements worth thinking about. Diving in headfirst is unlikely to yield effective results if you don’t, for example, work out a spending limit that you know you can stick to. It’s worth examining your spending habits, both good and bad, to help you work out a realistic limit.
It’s important, too, to have a contingency plan in place for when unexpected expenses arise, such as car repairs or sudden bill hikes. Whether you put a little money into an emergency fund each month or earmark a lump sum that you never touch, it’s a safety net you’ll be thankful for.
Your budget has to work for you. So, when creating a budget, choose an approach that you’re comfortable with. It could be a budget spreadsheet or you might decide to use budgeting apps. Whatever you choose, here’s how to make a budget and keep at it in five easy steps.
Start by calculating your net income, which is your monthly income after all taxes and deductions are taken from what you earn. Also called take-home pay, it should include your wages from work plus any benefits, freelance earnings, or other sources of income you receive.
Now for the tricky bit: working out your typical monthly expenses. These include your fixed expenses, such as paying your bills, gym membership fees, and insurance. You may find using an insurance calculator or similar tool useful to help you work out your monthly costs.
Then there are your variable expenses, the costs of which will vary from month to month. They could cover everything from spending money for a morning cup of coffee to money you put away in investment accounts like a managed fund.
Once you have your income and expenses figured out, you can start to set goals. Perhaps you’re planning to invest in a new financial product or you want to put as much money as possible into your retirement accounts.
Or, you might have debt repayment or savings goals. Regardless, make sure they’re crystal clear and they’ll be far easier to work towards.
After you set financial goals, take a look at your fixed and variable expenses and consider what adjustments you can make to reach your goal faster. Then, build your new budget plan around those adjustments.
If you’re serious about your budget, you’ll need to review it regularly. Your living expenses or long-term aims may change over time. If that happens, it helps to reevaluate how you’ve budgeted your money. It might be necessary for you to rework the balance between your income and expenses to make things work moving forwards.
So, you know what you need to do to write up an effective budget. For those who want to start budgeting as a means of saving more, there’s a useful method you can use when you set your goals.
Important: The 50-30-20 budgeting rule is the idea that you spend up to 50% of your net income on things that you need; 30% on things that you want; while the remaining 20% of your money goes into your savings. When you set up your budget with this as a guiding principle, you can be sure you’ll always set aside plenty each month.
Even with the best of intentions, grocery shopping all too easily ends up costing more than what the budget allows for. So, when you’re setting your food budget, keep in mind the temptations that can happen in-store.
Other than that, there’s no hard and fast rule for how to budget for groceries. After all, each household is different. So, consider using a budget calculator or a budgeting spreadsheet to work out the maximum spend you can afford each month and give yourself some wiggle room. The same can be said for other essential but variable expenses.
While budgeting itself is straightforward enough, it can be difficult to keep to a budget, particularly if you’re new to tracking your spending and imposing a spending limit. Thankfully, there are techniques you can try to ease yourself in.
One such technique is the envelope system, which involves withdrawing the money you’ve earmarked for your expenses and splitting it up into separate envelopes.
For example, you could have an envelope for food shopping, one for evenings out with friends, and one for gift-buying. This will help you better track your expenses and avoid overspending.
You could also invest in a budget planner that you can carry around with you wherever you go. That way, you’ll always have eyes on your financial to-dos, savings goals, and spending limits. They’re a great way to help you stay organised and keep on top of your finances at all times.
Note: Give these techniques a try if budgeting doesn’t come naturally to you. If you find that you’re still struggling to stick to your budget, then you might benefit from seeking financial advice. With expert input, you’re sure to feel far more capable of sticking to your personalised budget, especially if you prepare it together.
By setting goals and tracking spending, you can build credit, pay off debt, save for retirement, and more. But don’t worry too much if you don’t know how to make a budget.
By following our top tips and working with approaches that make sense for you, you’ll find that budgeting can be pretty straightforward. So, give it a try and see how much faster you move towards your targets.
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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs, or financial situation.