The Simple Guide to Budgeting

Budgeting is the place to start if you are looking for financial freedom. Everything in personal finance can be achieved through a good budget. However, many people looking for financial freedom are unfamiliar with how to budget correctly and effectively and thus often fall short of the goals they have set. In this article, you will see how to get a budget plan which works for you that can help you towards financial freedom. It’s a new year, go into it with a clearer sense of what money you have.

Step One: Note your income and expenses

The first important step into creating a budget that will help you towards a healthier bank balance is to make a note of all your income and expenses. You can use a piece of paper or a spreadsheet to do this. Spreadsheets are often easier to manipulate and recalculate but if you are not comfortable with technology then paper is fine.

I would suggest you open up your online banks statement and see what is coming into and leaving your account on a monthly basis. Write it all down, along with a description as to what it is. Work out the amount of money you have left as disposable income (i.e. for food and other none set expenses) and review this amount. Is there enough left over to be comfortable? What about savings? Asking yourself these questions will let you know if you have enough money left over on a monthly basis to cover all the other things you might need or want to do. If you feel you need to increase the amount left over, we have two options. Cut expenses or increase your income. Both of these are explained in the following two steps.

Step Two: Cut expenses

Budgeting mainly relies on expenses. They are often easier to control than your income and therefore make up a fair proportion of your ability to adjust the remaining amount of money left. To cut expenses, group your expenses into two categories – needs and wants. You need to do this honestly or else you will have a budget which isn’t as strong as it could possibly be. For example, your mortgage or rent is a need – shelter is an important part of your well-being and therefore you should ensure that this is treated as something you need. On the other hand, your subscription to Netflix, a magazine or something of the sort is a want. It might seem like it isn’t taking up much money, but they add up very quickly.

Once you have sorted between wants and needs, it is time to see which wants you can get rid of for now. Prioritize the needs, then see how many wants you can justify keeping. The less you keep, the healthier your budget. But it is important to balance for your personal happiness. For example, I have done away with my expensive eating out habit, but keep my Netflix subscription as I enjoy watching the shows. Remove some wants and then recalculate your remaining balance. It should look healthier now, but there are also more ways to improve the balance.

Step Three: Increase income

This is often a harder step. Income is less flexible than expenses and so people often forget about using it as a tool when budgeting. However, your income can still be changed. Ask for a raise if you have had the same level of pay for a long while, look for other jobs with a higher pay in the same field, start a side hustle so that you can earn some extra income. All of these methods may seem daunting at first, but are important things to do in order to improve your financial situation. It can also help to do some small courses, cheap ones can be found online. These will improve your portfolio and thus make it so you can demand a higher wage as you are more talented.

Step Four: Save

Savings is one of the most forgotten things when it comes to personal finances of most people around the world. They are important for a rainy day, starting a business, or just helping towards retirement. It is recommended that you have saved enough for the next three months of expenses so you can cover yourself if you are made unemployed. However, this is a bare minimum and therefore it is ideal to save as much as you can.

I personally make it so that savings appear as a monthly expense, the same as paying rent for example. This way, I make sure I am adding to my savings on a monthly basis and getting as much money together as possible. I would highly recommend this approach. If you haven’t got anything saved yet, make this a priority. Cut as many wants as you can and filter this money into savings, once you have saved for three months of expenses, you can start moving funds back to wants slowly.

Step Five: Budgeting is forever

Your budget isn’t static. It is important to review where you are up to on a monthly basis, see how the remaining balance improves and adjust accordingly. Costs and income will change and therefore you will need to adjust the budget to match these changes. You should be changing your budget monthly, continuing to be critical of any wants you may be spending on and forever trying to improve the amount you are saving and the amount you have left. Keeping active with budgeting means you are more likely to be successful with it and less likely to forget about the targets you have set yourself.

9 Responses to “The Simple Guide to Budgeting”
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