Budgeting is an important financial skill.
A budget is an important financial planning tool that helps you to be in control over your spending habits. Whatever your goals, every sound financial plan begins with a budget. It is sometimes challenging to draw a budget, but you will have comfort when your finances are in order. If you are creating your first budget, we have created easy steps that you can follow to create a sound financial plan.
The first step to creating a good budget is to determine what you want to do with your money. Ask yourself what you want your money to do for you in the next three months, six months, or one year. Generally, you may need to set short-term, medium-term, and long-term goals. Just ensure that you set realistic goals according to the timeframe.
How much money do you earn monthly? If you are in fixed employment, write down your salary after all deductions such as tax and insurance payment. If you have a side business, ensure that you list down all the money that you get from that side. Additional income sources such as alimony, dividends, or social security should also be included.
If you always wonder where all your money goes, this is a good way to know. Most people will write down obvious expenses such as transport, housing, food, and utilities. Don’t overlook other expenses such as eating out, travel, entertainment, and personal care. You can also search online for a site about saving money to help you identify all your expenses, including the not-so-obvious ones. A good way to identify your expenses would be to gather receipts, credit cards, and bank statements from previous months.
Start by identifying the fixed monthly expenses. These are the mandatory expenses that require you to pay fixed amounts every month such as electricity or house rent. Variable expenses may change depending on the usage. They include gasoline, TV subscriptions, and eating out.
Deduct all your expenses from your income and assess the difference. Is there any amount left? If you are left with some amount to save, you are definitely on the right track. However, if your expenses exceed your monthly income, you risk falling into debt. The best option is to eliminate any expenditure that might be overburdening you. Some discretionary expenses can be eliminated. The idea is to never live beyond your means and don’t strive to bankroll your life through debt.
After making adjustments, decide what to do with your savings. You can decide to save into a contingency fund. It is wise to have some extra cash for a rainy day.
Budgeting may seem like a daunting task. If you strive to stick to it, you will start reaping the rewards, a few months down the line. In case of any challenges, you can always search for free online tools to make the process easier. Follow your budget strictly. It is the key to prudent financial planning.