A budget is a plan for every amount you have. The act of setting up a budget is called budgeting. Budgeting is an essential financial habit that you should adopt if you want to become successful because it helps to control your spending. If you have not lived on a budget or experienced the benefits of budgeting, it is easy to believe that creating a budget is a complete waste of time. As a newbie to the budgeting world, it is vital for you to understand why budgeting is important. This is because understanding the importance of having a financial plan leads to easy budgeting.
Do you need a budget? Yes! Everyone needs a budget, irrespective of how small or big one’s income is because it will be difficult to track what is going on with one’s money. So do not be afraid to start a budget and stick to it. It might not be easy, but it is worth it.
WHY BUDGETING IS IMPORTANT
It controls your spending.
Without a budget, nothing holds you back from spending beyond your means. Hence, having a budget allows you to watch your money and spending habits closely.
It helps you prepare for emergencies.
Every month cannot be the same! Budgeting makes it easier for you to prepare for rainy days. In addition, living on a budget gives you the liberty to save for emergencies. If you spend your money without having a concrete plan, you might not be able to meet up with the unexpected expenses that may come your way in the future.
It helps you reach your financial goals.
Setting a financial goal is one thing, and achieving it is another. In other to achieve a goal, you have to stick to a plan; and that is why budgeting is important. Budgeting is a plan that keeps you on track and allows you to reach your financial goals. In addition, it allows you to set boundaries and restrictions on your finances which is necessary to achieve financial freedom.
It leads to financial contentment.
Setting up a budget makes it easy for you to stay within your financial limit. Therefore, you do not have to spend money that you do not have. This is known as financial contentment.
It can help your family.
It is common knowledge that money is one of the causes of marriage problems. Having a budget puts you and your spouse on the same financial page. A clear budget will save you from an endless financial fight and will ease your finances in the future.
It helps you to avoid or get out of debt.
One way to prevent going into debt is to avoid spending money on things you cannot afford. Budgeting makes it easy for you to save money, so you do not have to purchase items on credit or borrow money from others.
It keeps you organized.
A famous saying goes, ‘He who fails to plan, plans to fail.’ Things can get messy when you go about life without a solid financial plan. There will be a huge difficulty in keeping track of how much money is coming in and going out of your pocket. Before you know it, you are overwhelmed and struggling to get by, and you are stressed about your finances. Therefore, an excellent financial plan keeps you organized.
SETTING UP A BUDGET
An in-depth understanding of your finances brings about easy budgeting. However, when you view budgeting as a tool needed to achieve your financial goals, only then will you understand that setting up a budget is not as complicated as it looks. Below are the steps you should follow.
DECIDE WHY YOU WANT TO START BUDGETING
Are you in debt, and you want to get out of debt? Do you want to trim your expenses? Do you want to save up for something important to you? Knowing why you want to start budgeting can make it easier to stick to it when you finally start it.
USE POSITIVE LANGUAGE
Some people see budgeting as a negative thing, and this makes them avoid it like the plague. Use positive and empowering language and change your mentality about budgeting.
DETERMINE WHAT BUDGETING METHOD YOU WANT TO ADOPT
There are so many ways to budget. Some people prefer to track their finances by hand using pen and paper, while some others prefer to automate it. You could also adopt the cash envelope system, which is an excellent way for some others to budget. If you do not want to link your bank accounts with budgeting apps, then you should opt for another method that does not require you to connect your bank details. Picking the right method you are comfortable with will lead to easy budgeting.
Some credit unions and banks provide free budgeting tools as part of their online and mobile banking platforms. This is beneficial for people who are scared to link their bank accounts to random budgeting apps.
Check your app store for numerous free budgeting tools which are available to use on mobile phones. Ensure they are secure and well-reviewed because you will be linking them to your financial accounts.
You can also search for budgeting software for your computer if you are concerned about unauthorized access online.
EXAMINE YOUR FINANCIAL PAPERWORK
Your financial paperwork includes 1099s, mortgage or auto loan statements, bank statements, utility bills, investment accounts, credit card bills, pay stubs, and receipts. Examining your financial paperwork gives you enough information about your income and expenditure. This is the foundation of budgeting because, without enough information about your finances, your financial plan would not work.
CALCULATE YOUR INCOME
Calculate your fixed and variable income. When preparing your budget, you should use your net income if you have a regular paycheck. Do not forget to include other sources of income like social security and child support in your budgeting too. Also, budgeting works fine, too, if you are self-employed. If you are a freelancer and you receive variable income, use the income from your least earning month as the baseline income to establish your budget.
LIST YOUR MONTHLY EXPENSES
One of the essential steps that can lead to easy budgeting is concisely listing all your monthly expenses. The list should include things like rent, mortgage payments, utilities, restaurant, child care, student loans, car payments, personal care and medicine, insurance, travel, transportation, entertainment, groceries, and savings. Use your financial paperwork to identify all your expenses.
DETERMINE YOUR FIXED AND VARIABLE EXPENSES
Fixed expenses are compulsory expenses that require you to pay the same amount every time. They include rent or mortgage, car payments, etc. Variable expenses change from month to month. They include entertainment, groceries, gifts, eating out, and gasoline. Unexpected expenses like money spent for emergencies should also be included.
ASSESS YOUR MONTHLY INCOME AND EXPENDITURE
Analyze your income and expenditure. If your monthly expenditure is lower than your monthly income, then you are off to a good start. This means that you can put the extra money into other areas of your budget like savings or retirement plans. But if what you spend in a month is more than your monthly income, that means that you are spending way above your financial limit, and you need to make some changes.
MAKE NECESSARY ADJUSTMENTS
After assessing your income and expenses, make the necessary adjustments. Next, evaluate your fixed and variable expenses and cut off unnecessary expenses. Finally, aim to create a balance between your income and expenditure. This means that all your income can be accounted for and budgeted towards a particular expense or savings.
USING THE BUDGET, YOU HAVE CREATED
Setting up a budget is just the beginning. You will have to stick to it in other to make your financial journey easy and successful. After creating the budget, you need to monitor and track your expenses in each of the categories created in your budget. When you reach your spending limit in a category in your budget, you will have to stop that kind of spending in that category for the month or shift to another category in the budget to cover additional expenses.
The essence of budgeting is to make your expenses equal to or lower than your income.
When circumstances change, such as changing jobs, moving, or having children, restructure your budget so that your financial goal can be in line with your new reality.
CONCLUSION
Overall, setting up a budget is not difficult as long as you are willing and ready to learn. Understand that budgets are not set in stone, and things are bound to change. Hence, leaving room for surprises is key for budgeting. Nobody can predict what will able in the future. So, it is advisable to set money aside for unforeseen contingencies. In the process of establishing your financial plan, do not forget to set realistic goals. Take enough time to learn some financial skills that can help improve your financial literacy and make money work for you.
