How much of your income do you spend or intend to spend on food or groceries? A simple budget could help you determine the amount of money you intend to spend on a particular item.
Having a detailed written plan on how you’re going to spend your income before you actually begin spending is one of the most effective ways to keep your expenses or finances in check.
A financial budget allows you to do just that. It’s a blueprint detailing how much of your income you intend to spend on one thing and then another.
For instance, if before spending you decide that you’re going to spend $200 of your income on transportation and $50 dining out, you’ve in reality created a budget—a mental budget.
Having a budget or creating a working budget will help you avoid impulse purchases (the buying of things you didn’t plan or intend to).
Budgeting will also help you track and manage your expenses, assist in reaching your savings goals, and ultimately help you be in control of your finances.
Whether you’re a novice looking for a quick guide on how to create a simple budget or a financially savvy person looking for ways to hone your budgeting skills, this article is written for you.
Below is a step-by-step guide for creating a working financial budget.
Get some budgeting tools first
You don’t need to spend money on budgeting tools if you choose not to; sometimes all you need is a spreadsheet program like Microsoft Excel or a pen and paper if you’re a Luddite—the traditional way. These simple tools will help you track both your expenses and income.
Create and password-protect a folder for budgeting and recording all your financial decisions; this is where you would keep your budget and review it from time to time. Moreover, all your financial goals, plans, or thoughts should be recorded in that folder.
You’ll need to create a section for recording all your income and daily or monthly expenses in the Excel program. Create labels for tracking your spending, income, or expenditure. If this is too much work for you, you can use any of the built-in budget templates in Excel. That should be fine.
Determine your net income
With your budgeting tools in place, your next step would be to determine your net income.
This is income after taxes and deductions, which includes insurance and retirement programs offered by your employer, just to mention a few.
You don’t want to use your overall income, as that will leave you thinking you have more money to spend.
Using your overall income also encourages profligate spending; that’s why you would want to avoid it.
Use the same net income for all your income streams if you have diverse income sources.
And for freelancers, your net income will be income after all charges: taxes, charges from your bank account through which you receive remuneration from clients, etcetera.
Track your expenditure
What do you spend your money on? Knowing where your money is going is crucial for effective budgeting.
To determine where and what you spend your money on, you will need a one- to three-month track record of your expenses.
Or you can brainstorm what you spend your money on; the downside of this is that you won’t get accurate figures and estimates. I therefore encourage the former.
To track your expenses, either use a pen and paper or your spreadsheet program; open the program and label the month and date for each day and another label tagged “expenses or amount.”
Later, you can create a separate spreadsheet and categorize your expenses into home, transportation, groceries, entertainment, savings, etcetera. But at this stage, focus on getting all that you spend your money on without the categories.
Your expenses can be divided into fixed and variable expenditures.
Fixed expenses include car payments, rent, mortgages, and more, and variable expenditures include groceries, transportation costs, entertainment, etcetera. Record your daily expenses as well.
Set realistic financial goals
I will assume you have a record of all that you spend your money on; you know what you spend money on and where much of your money is spent. Moreover, you may now be conscious of unnecessary expenditures as well.
It’s now time to create a realistic goal; the key to creating and following a budget rigorously is to be realistic.
Your goal should be general and specific; for instance, you may want to save three months of emergency funds, cut out spending on entertainment or subscriptions, etcetera. Whatever your goal is, it should be realistic.
Your financial goals can be divided into short-term goals and long-term goals.
Short-term goals are those goals you need less time to achieve, say 1 to 3 years, for instance, creating an emergency fund, paying credit card debt, or paying a mortgage.
Long-term goals may take more than three years; for instance, saving to buy a new house or retirement savings. After determining your goals, the next step is to
Create your budget around your goals
A budget is actually a blueprint for how you’re going to spend your money before spending it. Your budget serves as a roadmap for reaching your financial decisions or goal.
The financial goals you create should not only be realistic but also hinge on your budget.
Once you’ve created your budget around your goals, you may notice that, as the days go by, you may want to make changes to your goals. Yes, it’s necessary, and that leads us to the next point.
Periodically review your budget
A periodic review of your budget is indispensable for meeting your financial goals.
You may need to make changes to your budget as your priorities change or even recreate the budget because you’re unable to realistically achieve some plans or goals.
Whichever way, make sure you review or revisit your budget every so often to stay aware and on track.
Save and Invest
It can never go without pointing out that you’d need to budget for savings. Saving goals include an emergency fund, saving for vacation, debt payment or mortgage (maybe you want a new house), and more.
Make sure you have a separate account for each savings goal and also keep the savings in a high-yield account to get a good return on your money.
Even though saving is good, it’s even better when you invest your savings.
Choose less risky investment options, such as Treasury bills or fixed deposits, to get a good return on your investments.
If you have a higher risk tolerance, then you could opt for investment options such as stocks, ETFs, cryptocurrencies, and more.
In a Nutshell,
A financial budget is a blueprint detailing how you’re going to spend your income before you are in a position to spend it.
Creating a simple budget and sticking to it will help you track your income and expenses, give you more control over your money, and help you reach your savings and investment goals.
With simple tools such as Excel or spreadsheet software, you can track your daily expenses and income, set financial goals, and create your budget around these goals.
Periodically reviewing your budget will help you stay on track, and by saving and investing part of your money, you’ll get a return on your investment and stay on top of your finances.
Frequently Asked Questions
Are budgeting apps worth it?
Budgeting apps can offer you an easy way of tracking your daily finances, including spending and income.
For those who don’t have time to create a budget on their own, budgeting apps can help create one quickly without much effort.
How can I stick to a budget?
Creating a budget is not easy, but sticking to a budget is even more elusive. The key to following your budget is to be realistic.
Moreover, by being disciplined and consistently reviewing your budget, you can stick to it.
Further, consistently remind yourself of how your inability to stick to the budget can affect your finances, such as huge debt and an inability to cope with financial crises. This is the least said.
Do rich people budget their money?
Certainly, though many do this unconsciously, rich people are in control of their finances and make time to budget.
Some hire financial advisors to help them out.
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