Budgeting 101: How to Create a Simple Budget that Works
Are you planning to gain more control over spending and start working towards attaining your financial goals? If so, then you need to create a budget. While many of us tend to associate the word “budget” with restricted spending, the truth is that a budget is a useful tool that ensures efficient expenditure.
The primary purpose of a budget is to show you how much money you expect to bring in and how much money you should spend to avoid financial troubles. It simply tells you where your money is going.
With an efficient budget, you take charge of your financial life and only apply for a fast money loan when it is absolutely critical.
However, not all of us are good at creating a budget. So, if you are a first-time budgeter and wondering what to do, make sure you follow these simple tips that will help you create a budget that works.
Establish Your Total Income
The first thing you need to do is determine your income since your budget needs to reflect your monthly income. If you are paid weekly, take the total of your four income periods to get your average monthly income. If you are paid bi-weekly, sum up your two-income periods to get your average monthly income.
If you have an investment or savings account, you’ll also need to know how much money is in each account as well to get a clear picture of your current financial situation. Take note of this information since it will be critical when establishing how much money you can spend every month.
List All Your Expenses
Once you have established your average monthly income, create a list of your expected monthly expenses. This includes your car payment, mortgage payment, utilities, groceries, auto insurance premiums, student loans, entertainment, and any other expense that you may incur.
What you are doing at this point is basically trying to figure out the things that will be consuming your income. It is critical to keep in mind that every dollar you spend must be accounted for. Therefore, no matter how small an expense may seem, be sure to write it down.
Adjust Your Expenses
After listing your expenses, take time to look at them and figure out which ones are fixed (non-discretionary) and which ones are somehow variable (discretionary).Examples of non-discretionary expenses include insurance premiums, rent, and mortgage.
Costs that can be uncapped or even eliminated from your budget if need be such as entertainment are discretionary. This is also an excellent time to decide how much you wish to save every month and list it as a fixed expense.
Sum Up Your Monthly Income and Monthly Expenses
If your result shows more income than expenses, then you are good to go. This means that you can channel the excess amount to other areas of your budget, such as repaying a loan balance to eliminate the debt faster.
However, if your results show higher expenses than income, then it means you need to sit down and adjust your expenses accordingly.
Review Your Budget Regularly
Finally, it is critical to review your budget regularly to help you stay on track. After the first month, sit down and compare the actual expenses you have incurred versus what you had indicated on your budget. This will show you where you did well and the areas you need to improve on the next month.