Money can’t buy happiness, but it can sure help you in attaining it – that’s if you manage to use it smartly and build it up. On the other side of things, not knowing how to manage your money can be disastrous. It can leave you living paycheck to paycheck, in a situation where you don’t have the money to cover for emergencies or, worst case scenario, are forced to take out loans, pushing on you massive debt and an endless lifetime of being broke.
The main reason for this is a lack of financial education, so if you want to stop this happening to you, you’re going to need to learn how to manage your money. That topic covers a whole range of things, from investing and saving to property and assets. However, before you go anywhere near that deep end, you need to learn how to budget.
Learning to budget is the foundational point that wealth is built on. Being able to do it properly ensures all expenses are paid for and that you are never in a situation where a bill creeps up on you because you impulse bought take out when you shouldn’t have.
Budgets aren’t just for building wealth up, though. Primarily, you want to use them as a defensive tool as opposed to an offensive one.
That’s because proper budgets are going to help you avoid debt. There is one primary reason people get into debt, and that’s because they spend more than they make. Now, while there are times that things come up that force this situation, most people and up doing this without even realizing it, especially if they have a credit card. By monitoring what’s coming in and out, you can make better decisions and decrease the risk of overspending drastically.
So how do you do it?
How to Start Budgeting
It’s worth pointing out that no two budgets are ever really the same. Sure, there are standardized budgets in the business world. Most profit and loss accounts are going to look similar, as well as with balance sheets. For personal finance, the whole thing is much more, well, personal. Not only does it allow you to see and plan, but it helps you develop good spending habits, as well.
That being said, you don’t need to be running off to get a finance degree so that you can build a budget from the ground up, nor do you need to spend hours and days thinking up a homemade system. There are a few rules, layouts, and other conventions you can follow to make the whole process as easy as possible.
Why Are You Budgeting?
The first step is to actually figure out why you want a budget in the first place. What you need to realize is that, by choosing to live off of a budget, you are entering into the minority of households. For most people, it can be very tough going, so you need to determine why you want to do it and what your goals are.
Some of the more popular reasons people start budgeting are to save more money, reduce overspending and poor buying habits, get out of debt, avoiding going into debt in the first place, help a relationship, and to avoid living paycheck to paycheck.
While society generally separates finances and figures from emotions, in this case, the two are closely linked. Your motivations for budgeting play a large psychological role in whether or not you are going to stick to the budget to begin with. Putting time and effort into a budget and putting your goals physically down on paper develops an emotional investment in it, making it far more likely that you are going to stick to it, and increases the satisfaction you’re going to feel when you hit your targets.
Analyze Spending Habits
Next, you need to look very closely at your current spending routines and habits. This doesn’t mean just glancing over your most recent bank statement, but rather going in deep and analyzing everything.
Without knowing what you’re dealing with and where the problem areas are, your budget is just not going to be realistic or achievable. You should be going back one or two months to properly analyze your card habits. If you mainly use cash, you are going to have to either keep receipts for a few weeks or use a notepad to write down every time you spend something, where you spend it, what on, and how much.
You could also go digital with this approach and use an Excel or Google spreadsheet to track your spending. It takes time, and you might forget to enter things, but it is the most effective. There are plenty of templates out there to use, but if you’re making your own, there are a few metrics to monitor. Here’s an example if you’re wondering where to start:
|5/2||Grocery store||Groceries||$156.74||Weekly groceries|
|5/4||Mall||Shirt||$18.63||Shopping with friends|
|5/5||Fast food||Lunch||$13.25||Forgot lunch|
This is just a basic tracker, though. If you wanted to go more in-depth, you could divide it by location to see if you have a habit of spending money more in certain places over others – or any other number of metrics. Doing this takes longer, but offers more insight into your financial routines.
If you don’t want to go through the effort of manually drawing up a tracker, there are plenty of apps out there that do it for you. The likes of Mint, PocketGuard, and Dollarbird link all your bank accounts, credit cards, and so on together, meaning you have everything in one convenient spot.
Unfortunately, when planning out finances, it’s never as simple as allocating X, Y, and Z every week. There are irregular expenses popping up all the time, either predictable or unpredictable. While all you can do to prepare for the unexpected is to stash some cash away, you can plan in advance for the irregular expenses you know you have to overcome. Holidays, birthdays, car inspections, professional dues, any property tax you need to pay, insurance premiums, doctor checkups, birthdays, and more are expenses you can plan for.
After that’s out of the way, you need to add up your income and expenditure. Budgeting is all about how you use the money you bring in, so you need to know how much that is before anything. You need to factor in income from every source, which includes your primary wages or salary from your job, government subsidies child support, dividends, passive income, freelance, nighttime jobs, and more.
The sources you have differ from person to person and double if you and your partner are budgeting together. It can also be hard to know exactly how much you’re going to make, especially if you freelance or get shift work. To counter this, you’re going to need to use an average for your budget.
Say you budget for all your income, and you get a total of $1,100 dollars per week. Use that to pay what needs to be paid, and any more than that, you should stick into a savings account. It’s important that you be realistic here, so don’t plan to have more money than you’re going to make.
You don’t have to do this weekly, either; you could do it biweekly or even monthly. Again, budgets are completely personalized to the individual, so do whatever works for you. You could even use more than one budget that works in tandem with each other; it’s all up to you.
Plan for Expenses
Once you have your income jotted down and your average calculated, you need to plot out your expenses. The approach you’re going to be taking to this is significantly more concrete than that of your income, given that you can control a lot of your outgoings.
Start with your fixed expenses, regular loan payments, fixed bills, and so on. You know definitely how much that is going to cost you each month, so that’s easy to calculate. For any variable bills, again, you’re going to want the average approach. That’s for bills and responsibilities you’re going to have to pay.
For things like groceries, you’re going to have to give yourself a limit. First, sit down and plan out meals for the week. Then go to the shop with your list, and pick everything up. Once your home, take a look at the total, round it up to a multiple of 25, and use that as your set amount each week for groceries. This might seem like a lot of work just for planning out food, but groceries are one of the biggest budget killers that people don’t expect. So plan it out to avoid blowing through all your wages on foods you aren’t going to eat.
Long Term Goals
Once you have all your income and expenditure calculated, you can start plotting down some long term goals.
While you may just want to budget to avoid falling into debt, if you do it well, you’re going to end up with excess cash. So what do you do with it? You could just spend it all on something nice, which is fine every now and again, but you’re trying to be more financially responsible, so you want to put it towards something.
There are loads of long-term savings goals, like retirement, building up an emergency fund, saving for a house or a new car, college, building an investment portfolio, or any other number of constructive uses for money.
Pick out the long-term goals that are the most important to you. You want to be specific when you’re planning this out, and you want to give yourself deadlines. Say you want a new car. Instead of just saying you’re going to save for a new car, make a specific plan to save $7,500 dollars for a new car by the 31st of December next year. Doing this helps materialize the goal; it turns it from an abstract idea into something physical you can visualize.
Once you have those goals down, you need to decide how much you want to save towards them. While you can just use the excess cash exclusively to fund them, splitting it with percentages if you have more than one, you’re better off putting a set amount to it and topping that up with anything you have leftover.
This way, you can be sure that you’re going to hit your target by a specific point instead of relying on unpredictable excess income.
Now that all the theory work is done, it’s time to decide what type of budget to use.
Types of Budgets
As mentioned at the beginning, no budgets are the same, and you can make one from scratch if you want, but to make your life easier, you’re better off using some of the other well-known systems as a foundation to build upon.
Zero Based Budget
One of the more restrictive types of budgets is a zero-based budget. This is the type of budget employed by a lot of businesses and corporations. In it, your income minus outgoings always equal zero. This way, every single dollar has a job to do, and there is no room for overspending. It is super optimized but can be hard to stick to, especially if you’re just starting out.
A far easier budget for beginners to work with is the 50/30/20 budget that was popularized by Senator Elizabeth Warren. In it, you set aside 50% percent of your income for needs, such as bills, food, rent, debt, and so on. You then use 30% percent for wants – so things like Netflix subscriptions, movie nights, takeaways, and any other things you want to buy. Finally, 20% is put into savings. With this budget, you have plenty of flexibility, while the opportunity to build up savings and cover your expenses is still there.
Making a Budget
Now that the planning is all done, it’s finally time to make your budget. The first step in this is deciding what medium to use to create it. There are a few good apps out there that do the hard work for you, such as Mint, as mentioned before, as well as PocketGuard. However, there are plenty of free and premium apps out there for budgeting, so shop around if that’s the route you want to take. On the other hand, no app is going to serve you as well as a trusty notebook, pocketbook, or Excel spreadsheet.
If you are making your own budget, the first step is to create categories. You can use whatever ones you want. For example, you could have a single food category or one each for groceries and takeout.
Separate your spreadsheet into two sections: one for income and one for expenditure. You can do this vertically like a profit and loss account or horizontally. Alternatively, you could do it like a calendar, with expenses for each day, or combine the two.
Set up your categories as you need them, either in columns or row, but don’t fill in the boxes yet.
Once the layout is done, make a copy of the file, copy and paste the layout onto another page in the spreadsheet or next to it.
Go back to the original, and fill in your data. After that, it’s just a matter of sticking to it. It’s easier to track it if you do it daily, so consider laying out your income and expenses and set up a calendar system to estimate how much you need to spend each day.
Whether you review it daily, weekly, or monthly, chances are, your actual spending is going to differ from your projections. That’s where the other layout that you copied comes in. Fill that one in with how much each item actually cost you. Doing this not only allows you to track it and adjust going forward, but it allows you to compare the two and see where you went wrong.
That’s the end of your first budget. Follow this guide, and you should be well on your way to creating a financially foolproof plan for the future. Remember, though; consistency is key, so make sure you’re sticking to it.