What does it mean to budget? I believe that the correct way to look at a successful budget is not to restrict what you can spend; but rather to spend intelligently, without guilt or regret. The purpose of a budget is to assign every dollar a goal ahead of time.
An easy way to think about the importance of assigning your income is to understand that if you don’t give your money a purpose, you will spend it without a plan. Any money leftover from covering your bills should not be considered “money to blow.” Instead, you should consider it capital that you can allocate towards long-term goals.
Many people would break out in a cold sweat when they confront the idea of developing a household budget. Contrary to the stigma, creating a realistic budget does not need to be stressful or time-consuming. This is especially true now, given the large assortment of personal finance applications and templates available for download online. Examples of these applications include Mint, You Need a Budget, Wally, Acorns, and Tycoon.
In addition to these applications, there are many resources online for spreadsheets that will help breakdown expenditures in the most convenient way possible. Even with these digital tools at your disposal, it is still important to understand the most basic aspects of balancing a budget by hand.
Easy Steps Towards a Functional Personal Budget
To begin balancing a budget you will simply break down your monthly income and expenses and then total them together. This process will show you the breakdown of your current financial situation. After having gained this understanding, moving forward towards your financial goals is a matter of making adjustments on how you want your money to be spent.
1. Calculate Your Income
First and foremost, you need to have a comprehensive understanding of your own income. This step may be challenging for those who are paid by commission or work inconsistently for an hourly wage. To start a budgeting plan with complications such as these, try finding an average monthly income based off of your most recent few months of work. The budget can always be adjusted if your estimate was too high or low.
In addition to your earned income, be sure to include other sources of revenue that may be supplementing your earnings such as portfolio income or any type of passive income you may be involved with. Every person’s income stream is unique, so be sure to include any unusual sources of revenue such as child support.
2. Understand Your Expenses
Next, understand your own expenses. To understand your own expenses it is necessary to break down everything that you regularly spend money on and then categorize based on priority. Common expenses to consider include:
- Mortgage payments or rent
- Car payments
- Transportation costs
Finding a monthly cost for some statements, such as insurance, can be difficult because you usually pay them quarterly or semi-annually. To break these costs down into monthly rates you can divide your annual expense by twelve.
A great way to make sure you don’t miss recurring expenses for the most accurate budget plan possible is to review your financial paperwork. Reading through a few months of your recent bank statements, utility bills, credit card bills, and loan statements can help ensure that you’ve include it all. Now you just need to arrange them in an order that makes sense to you. This budget isn’t someone else’s plan, it’s created and carried out by you.
3. Total Your Monthly Income and Expenses
At this point you should have an understanding of your own monthly inflow and outflow of cash, now it’s time to bring it all together and gain a feel for your complete financial landscape. If your income is higher than your expenses this means you have a balanced budget. In other words, you’re off to a great start and already live a sustainable lifestyle.
As mentioned earlier, money left over from covering the essential expenses of living should not be considered a bonus. Yes, it is still money you will be spending at your own discretion, but it is to your own benefit to understand that chipping away a long term financial strategy or goal such as retirement savings is a smart allocation of your discretionary spending.
If your monthly expenses are more than your income, that means you are overspending and need to re-evaluate how you spend your money. You can start by finding areas in your variable expenses that you can cut. Take a look at how you have categorized your monthly expenses. Now draw your attention to the bottom of the list where you’ve laid out your least prioritized categories.
From there you will need to make the decisions of what to spend less money on. Everyone will prioritize their own spending in different ways according to their own values.
How to Use Your Budget
Monitor and Track Expenses
Initially balancing your budget is a great start to understanding the scope of your financial situation however the purpose of having one is to continuously log your spending and make adjustments. Recording what you spent throughout the month will relieve the stress of not knowing what you can afford. Taking moments at the end of each day to enter your spending into the application or spreadsheet of your choice will build strong habits and not leave you with an overwhelming amount of receipts/statements to interpret at the end of the month.
As you use your budget, keep an eye on how much you have spent. Once you have reached the spending limit in a particular category, you will either need to pause that type of spending for the month or allocate money from a less important category to cover additional expenses.
Make Adjustments to Your Budget
No two months will be financially identical, which calls for the need to adjust the structure of your budget. Adjusting is not a complicated process. It’s simply changing the amount of money you allocate to different categories before you actually spend it.
For example, if in your first month of following your budget you spent twice as much money on groceries than you had anticipated you should double the amount of money you plan on spending in that category for the next month (or just buy fewer groceries).
In addition to keeping your spending organized and thought out, adjustments will also keep you accountable for understanding that you tend to overspend in certain categories.
Making a Budget: Recap
The sooner you can get on track and see that balancing a budgeting (even in its simplest forms) actually works, the sooner you will be excited about it. You will want to continuously adjust your budgeting habits instead of lacking the motivation to do so. It is so important to understand how beneficial and life changing having a good system of money management is for individuals to truly no longer worry about their finances.