Many people involuntarily have a monetary black hole in their lives. What this means is that when they get money, it’s spent without any trace of what it was spent on. Sometimes, if you can trace it, you find that the cause for the spend was unwarranted.
When you consider all this, you begin to see how implementing a budget in your life can improve your cashflow. There are no words to describe the extent to which budgeting gives you much greater financial control.
There are many concepts involved in a budget, just as there are multiple ways you can prepare one. In this article, you can expect to read all you need to know about budgets, plus there is a look at how you can create your budget in Microsoft Excel.
What Is a Budget?
You most likely have a general idea of the answer to this question, but there is no harm in putting some specifics to it. Note that there are both corporate and personal (household) budgets. While some of the concepts can apply to either type of budget, this article is concerned with personal budgets.
A budget is a summary of all the income and expenses that you expect. It is meant to be a roadmap based on predictions. There’s typically a time period that the budget represents. Some people do their budgeting by the quarter or by the year, but it’s most common to do so using monthly periods. Doing so gives a more modular breakdown, and there is more data for period comparisons.
The idea of a budget is not to lessen your spending, though the possibility exists that cutbacks may happen based on what you determine from creating one. The point is for you to maximize your efficiency in the way you spend. So remember to make your budget efficient instead of completely focusing on being conservative.
The budget is intended to separate your sources of income and expenditure so you can see how much each contributes to the bigger picture.
The Purpose of Your Budget
Now, you know what the budget is, but what does it do for you? The budget is a roadmap, as stated above, but it is also a monitoring tool. When you use it to plan your spending, you’re not supposed to just ignore it when the applicable period is passing. The idea is that you keep coming back to the budget to see how closely you’re managing to follow the designated plan.
While you’re doing this, you’re also likely to pick up on your healthy and unhealthy spending patterns. Having them readily documented makes it easier for you to set objectives to curb the habits that are bringing you down financially.
This is the reason that you should never try to cut corners as you create the budget. The less information that is available, the less accurate the budget is likely to be when compared to what really takes place. You can’t create a proper roadmap if some of the roads to the destination are missing.
Try to be as detailed as possible if you truly want your budget to become the useful tool that you intend it to become.
Creating Your Budget
Following are the steps that you need to go through, as you work on creating a suitable budget.
Establish the Budget’s Purpose
If you don’t do this, then don’t bother with the budget. Don’t ever start drawing up a map that’s not meant to lead to any destination. That’s a waste of both energy and time. Most people don’t live by a budget, and many of those who don’t have tried and failed because of the general lack of direction.
You can think of this in the same manner that you would think of starting an exercise or diet regime. If you are someone who maintains healthy habits, why do you do so? If you are not, what would be your motivation for doing so? Naturally, you wouldn’t respond by saying something like “for exercising sake.” The chances are that you’d do it to keep fit, maintain a healthy weight, increase strength, etc.
Likewise, you need to determine why you’re drawing up a budget before you go ahead and do it. Remember that the idea is to ensure that you’re using your money in the most efficient way possible. That is easiest to achieve when you know what efficient means in the context of the goals that you’ve set. Here are some of the main reasons that people create budgets:
- Reducing debt
- Achieving long-term financial goals
- Finding routes to allow for more saving
- Finding routes to allow for better investments
- Cutting overspending
Ascertain Your Current Habits
Before you decide where you want to go, you need to at least know where you are. The way to do this with budgeting is to start by looking at the way in which you currently spend money. If everything were perfect with the way you did that, then you probably wouldn’t even be considering the creation of any budget.
Note that this is not always something you can figure out immediately. This is even more so if you’re one of the people that have trouble accounting for where money goes. You may need to actively monitor yourself during a normal month to get an idea of where the money is going.
You need to keep honest with this. Some people feel inclined to make small changes when they’re accounting, as they don’t want things to look too bad. Remember that there’s no better place for things to look bad, as that’s the point of creating your budget.
Account for Your Income
The next step is to note your income as accurately as is possible. Your income forms the pool of funding that is available to allow expenses to be covered. If this figure is too far off, your budget may as well not exist.
A good idea is to account for your net income in your budget. Your gross income is not a fully usable figure, so there’s no point in including it. Just remember to ensure that all your income is in full view. So whatever alternatives you have that provide you with money need to be accounted for.
Not everyone has a fixed income, so the people who have a variable one sometimes find it challenging to complete this step. What you can do is decide on a base figure. Even if your income is not constant, there’s usually a worst-case or average figure that you can use. Of course, the worst-case figure is the most extreme. The point is to use a single figure as your income. If you get extra, then you can just add it to the subsequent month’s base income.
Account for Your Expenses
This is the flip side of the income coin, so it is just as important. Most people create a budget because of this area. This is where you account for all the money that you spend monthly. Everything you can think of should go here. You should then categorize these expenses as fixed and variable.
The fixed ones are things such as rent, mortgage payments, and car payments. While there can be changes, the general figure is the same.
The variable ones can change each month. These include entertainment, groceries, and clothing purchases. This is the easier category to adjust, so you need to be as accurate as possible in recording it.
Get Your Totals
Now that you know what you’re working with, it’s time to total your monthly income and expenses. This is an important step to understand just how much you gain and how much you spend every month.
Doing this also gives you a clear indication of the extent to which your income is adequate to handle your expenses.
Make Your Adjustments
This is the part where you start making realistic adjustments to facilitate your needs based on the reason you established for creating the budget. This is the time to lower and cut the non-essentials as necessary.
The only thing that’s left to do is to review monthly to see how well you’ve managed to stick to the plan. You can also adjust based on what you see happening each month.
Creating a Budget in Microsoft Excel
You could write down all these inflows and outflows on a piece of paper and manually do your calculations. You could also use a calculator program and manually make your entries and changes.
Alternatively, you can use Excel to get your budgets done efficiently. Excel allows you numerous rows and columns to use, plus it automatically updates entries based on formulas you put it.
It may be a good idea to list your income and expenses in parallel columns. Ensure that any figures that reference other figures (like totals do) are filled in with formula calculations. This means that figures automatically adjust when you update figures they depend on.
Consider using a different sheet for each month and naming the sheets accordingly. This provides a neat way for you to review your progress and neatly organize your historical data.
You may even stand to benefit from seeing a pictorial representation of the figures. Excel features graphs and charts that you can use to achieve this. This gives an easily understandable idea of where things stand, and you also get insight into your trends to see which are healthy and which ones you need to kick to the curb.