Budgeting is a vital skill for essentially every adult. It can be difficult to keep track of your finances, especially once you become completely financially independent. If you are capable of creating a budget and following it, this can make it much easier to keep control of your spending, regardless of the occasion and cause. However, not all budgets are created equal. It is, therefore, especially important that you are able to come up with a budget that is reasonable and well-balanced in order to get the most out of the practice. This article covers the way in which one can come up with a balanced budget, as well as some of the uses for budgeting.
Do I Really Need a Budget?
You may be wondering if you can seriously benefit from budgeting. You almost certainly can. Unless you have unlimited income, then budgeting can greatly benefit you and your financial security. Budgeting helps you with several of the most important tasks you can do when it comes to managing your finances. Here are some of the most important:
- Keeping track of expendable/disposable income
- Understanding how much of your income you can save
- Planning and investing for your future
- Setting money aside for important expenses
A good budget also helps you to be prepared for the unexpected. It is not uncommon for people to experience unexpected hardships or emergencies and not have the necessary funds available to deal with the situation.
How Should I Shape a Budget?
There are many different methods that you can use in order to come up with a budget. These should change, depending on what works best for you. Something that these methods tend to have in common is that they emphasize breaking up your income or assets into separate parts, which then allows you to decide how much you have of each type of asset and how you can use them best.
Traditional Method of Budgeting
Very generally speaking, most types of budgeting have you break up your finances into several separate categories, which often include:
- Emergency savings: It is advised that you have at least 3 months worth of savings minimum in an account which you do not touch under any circumstances, unless it is absolutely necessary. The idea with this is that you have enough assets to tide you over for a few months, in case you find yourself unemployed or unable to work for a period of time. Having this emergency money set aside means that you are able to either wait out the situation or find a new job without becoming destitute.
- Monthly income: This is the money that you earn per month after taxes have been deducted. If you are creating a budget for the financial year instead of for a month, then you can simply multiply this number by 12 and include the taxes you pay for a whole year instead of for a month. This figure should be the basis for your budget, as it lays out the actual amount you have to work with.
- Monthly expenses: These expenses are usually more or less the same from month to month, varying only slightly depending on external factors. They include expenses like rent, public transport or gas money, groceries, money spent consistently on hobbies or interests, eating out, etc. Anything you spend a consistent amount of money on from month to month should be included into this part of the budget in order to have the most accurate picture of what you spend and what you need to set aside per month.
- Varying expenses: These are the things you spend money on monthly but that vary considerably and therefore cannot be made into a concrete figure or planned for in that way. Such expenses include eating out or going to the movies, for example, or gifts that you may buy for special occasions, birthdays, and the like.
- Special occasions: This concerns the money you set aside for occasions or events out of the ordinary, such as going on holiday or money you might spend if a friend comes to visit you. Depending on how often these types of events come up for you and how much money you tend to spend, the amount you might want to set aside can vary, and it may not be entirely necessary to put aside a concrete amount every month. Instead, you might choose to have a savings account where you set aside some money every month for such occasions.
Some Considerations Regarding This Method of Budgeting
This is a good method of budgeting for the average person who has a relatively good understanding of their monthly income and expenditure, but it may not be quite so suited to people whose income varies or who do not have as good of an understanding of their expenditures. For example, somebody who works in hospitality or entertainment may have an income that is considerably varied from month to month, and they may need to rely more heavily on their savings during quiet periods than somebody who works in a sector or industry where income is consistent. Somebody who is a student or in education may also experience such variation in their income, and they may also benefit from a less regimented style of budgeting.
50%, 30%, 20% Budgeting Method
Another method of budgeting that is somewhat more straightforward is breaking up your income into chunks of 50%, 30%, and 20%. The idea here is that 50% of your income goes to necessities and consistent monthly expenses, such as rent, groceries, bills, etc. 30% then goes to special occasions month to month, like holidays, eating out, going to the movies, and the like. Finally, the remaining 20% goes into your savings, and should only be used in emergencies or situations when it is completely necessary. This method of budgeting is perhaps more flexible than the aforementioned, but it also requires that the person doing the budgeting is in a position where they do not need to spend more than 50% of their income on their necessities from month to month. However, if this is not the case for you but you still want to try this method, you could adjust the proportions of which part of your income or expenditures go into savings and what can be used (for example, if 60% of your income is spent on necessities, then you can delegate the remaining 40% to savings and miscellaneous expenditures).
How Should I Make the Most of Budgeting?
In order to make the most of a potential budget, some preparation may be required on your part. There is not much point in simply starting to try to budget your finances without first having a good understanding of how much you earn and spend. As such, it is recommended that you first spend at least a month keeping track of all your finances and that you try not to deviate in any way from how you would typically spend or use your money during this month. That way, you should end up with a thorough understanding of how you would normally spend your money. You can figure out what you spend money on, how often you spend it, how much you usually have left at the end of the month, and if you spend any of your money excessively or frivolously.
Some people find it confusing or difficult to keep track of spending and expenses, but there are a variety of ways to make it relatively straightforward and pain-free. Organization is key if you want to make this task as simple as possible. You can use a spreadsheet to keep track of all your major expenses and compare this to your monthly income, taxes, and bills, for example. This way, you can compare how much you earn to how much you spend in a way that is visual and concrete. It is also a good idea to keep receipts so that you have a resource to fall back on if your numbers do not add up entirely. There are also apps that you can use for these types of tasks, and some banks also offer services through apps or other technologies that can break down or categorize your expenditures and income from month to month. This is a great way to simplify both the process and understanding of your financial situation, which is vital if you want to develop a budget that best suits you and your needs.
Once you have done this, you can then start to experiment with different kinds of budgeting to see which works best for you. If you are not sure whether or not a budget is going to work for you or what exactly you should try, then you should give some thought to your financial goals and aims. Not everybody knows what they should be doing with their money and how they should try to both save and spend it. Maybe you don’t actually have any specific goals in mind, or you have never given any thought to how you use your money and what you want your future to look like financially. If this is the case, spend some time thinking about this, and where you want to be in 5, 10, and 15 years’ time, for example. That way, you can acquire a better understanding of what you want to be aiming towards when you are thinking about your budgeting and your financial goals.
How Do I Make My Budget Balance?
Once you have developed a budget that you feel suits your lifestyle and your financial goals, the next step is to put it into practice and see if you can get it to balance at the end of the month. This may not happen on the first attempt, but there is no need to worry if you go slightly into the red, as long as you can identify the reason for that and ensure that you are more mindful of your expenditures the month after. If you find that you are not able to get your budget to balance, then you should experiment with various methods of keeping track of your expenditures in order to ensure that you are not going over your budget in any area of your life or any arena that you might be putting your income towards.
If you find that you are consistently unable to balance your budget, then you may need to reconsider how you have designed it and whether or not you need to adjust it slightly so that it is better suited to your expenditures and lifestyle. This is not too difficult to do if you ensure that you keep track of your income and expenditures from month to month in order to see what exactly you are using your money on and in what quantities. It is relatively common that people spend more money on food than they realize, for example. If you begin to track your expenditures thoroughly and notice that this is the case, then you can reconsider whether or not you should adjust your spending or budget accordingly. If you find that you are using more money than you anticipated on something that is very important, then you might want to delegate less of your income to another part of your budget in order to have more money available for the thing that is important to you, while still ensuring that your budget balances.