If you are trying to manage your finances. Then making a budget can help you get started with the process. The first step in turning your financial goals into reality is making a budget. A budget that not only looks good on paper but is also easy to apply practically. The goal is to track the most feasible way to track your finances. So, let’s get started to put a budget plan in action.
If you are not maintaining spreadsheets to manage your expenses then you need some other tool which can be an app or even pen and paper. Track your expenses by noting them down.
- What does a Budget do?
- Why budget doesn’t work for some people?
- 5 steps to make your budget
What does a Budget do?
A budget is a tool that allows you to plan your finances. It helps in tracking the spending habits and the amount spent. Making a budget sound like a tedious process but it is one of the most important elements in keeping your finances in order.
Why budget doesn’t work for some people?
There are so many people who complain that making a budget didn’t help them in keeping their finances on track. While making a budget, be honest about your income and expenses. You should work with detailed and accurate information. Set realistic and achievable goals. While making a budget don’t give excuses rather take an action to solve the issues.
Being honest with yourself about your expenses and incomes is essential in order to turn your budget into reality. To make an effective budget, you must be willing and determined to work with detailed and accurate information about your earning and spending habits.
5 steps to make your budget
1. Determine your income
The first step is to know how much money you earn from all income sources. Don’t forget to include dividend, interest, income from rent, etc. After calculating total income deduct taxes you need to pay. Tax rates are different for different sources of income. Calculate your income after tax accurately as it will give a more realistic result. Once, you calculate the income after tax.
2. Calculate expenses
Now we have found out how much you earn. Now it’s time to find out where it goes. Firstly, group your expenses into different groups for example transportation, health, education, grocery, bills related to the house (electricity, water, etc.), vacation, etc. Some expenses may not be monthly, you may these expenses quarterly, annually, semi-annually, etc. Take these expenses also into account while calculating your expenses.
Once you have listed all your expenses. Now it’s time to mark whether these expenses are fixed or variable. Some of them might be semi-variable also. This will help us in knowing where we can reduce our expenses.
Before moving to the next step. Ask yourself the question of whether certain expense in a need or want and then label them accordingly. This will further help us to understand better our expenses and to what extent we can reduce them.
3. Design your budget
What is the key to saving? A budget should cover all your needs. A fixed percentage of your income should be saved. After deducting savings and expenses for needs, you can use the remaining amount for wants. Be careful while using the amount for wants. This amount can also be invested and you can get a great return in future from this amount.
While making your final budget you can use the zero-based budgeting technique. If your expenses exceed your income. There are two ways to balance. The first is to increase your earnings and the second one is to reduce your expenditure. Look at your budget one more time and try to reduce expenses. It is easier to reduce expenses than to increase income. Match your expenses to your income. Decide beforehand that which expenses will be paid from which source of income.
Ask yourself, whether you are happy with the amount you are saving? If you are still not saving as much as you want. Check how much money you are paying as debt payments. Reduce debt as well as unnecessary expenses. This will help you increase your saving in long run.
4. Determine what to do with your saving
Congratulations, you have savings! The saving amount might be small or large. The aim is to utilize the amount most efficiently and effectively. You can either invest your savings or you can pay off your debt if the interest on debt is very high. You can substitute it with a low-interest debt. Investing in saving is one of the most sort out options by most people.
You can invest in various securities carrying low, moderate and high risk. Return is directly proportional to risk. Before investing in any security, know its pros and cons. 5 top investment plansto make most of your saving. Also, make an emergency fund and take insurance policies that suit your needs. It is extremely important to take insurance policies and make emergency fund to secure your future. This will also help you in having peace of mind.
5. Make it a habit
Making a budget is easy but following it is difficult. You should aim to stick to your budget by reviewing it weekly. This will help you in tracking your spending and sticking to your financial goals. It might be a little difficult for you to follow the budget. As for your entire life, you lived without any plan, so give yourself time to adjust. The key to follow a budget is to hold yourself accountable. Set reminders with your digital wallet, credit card, etc. once you have reached the pre-set spending amount. While spending doesn’t forget to record the same in an app or a spreadsheet or in any other way which is convenient to you. If you are sharing your expenses with someone. Make sure both of you are communicating the expense position and help each other to keep the expenses on track. Review your budget regularly.
Good luck and remember, there are various tools online which can help you in sticking to your budget. If you need help at any stage while setting your budget please comment. I will be more than happy to help you out with your budget.
