How to Make a Budget
A budget is an important financial tool in you keeping track of your finances and moving forward with your financial goals. Budgeting is the act of balancing your finances so you are able to use your funds for things that are important to you, cut back on expenses that are less important, and manage your money responsibly. Simply put, having a budget allows you to plan in advance how you’re going to use your money.
The Importance of Budgeting
Money impacts our lives in various and significant ways. It is the currency used to purchase items and afford experiences. It is also the currency which you receive a paycheck from your job or income from your business. Money comes and goes in a natural cycle and budgeting helps you be in control of your finances.
Budgeting is important in a lot of ways:
- It helps you spend within your means. Overspending is a condition that haunts millions of people around the world. It implies that your earnings are not enough to cover all your expenses. With the help of a budget, you will be able to get your spending under control and make sure you will have enough for things that really matter to you both for the long and short-term.
- It helps keep you out of debt. You can cure overspending with the help of a budget that works, and consequently, you will learn to rely more on your own financial resources rather than resort to borrowing additional funds to afford your wants and needs.
- It allows you to save. Apart from spending, a great and working budget also helps you save for whatever – a new pair shoes, your next car, your child’s education, and even your retirement. The key is to always consider these savings as a priority when planning out your budget and make room for them by cutting back on other expenses.
- It prepares you for emergencies. You also need to anticipate the unexpected, a.k.a. the emergencies and make room for them in your budget as well. You don’t have to specify what these funds will be for, but it will be the funds you tap in case of emergency. With that emergency fund, you will be less stressed if you need to go to the hospital or missed a bill that’s now due.
- It teaches important lessons in personal finance. Budgeting gives you a clearer idea of the ins and outs of your money and allows you to adopt some important financial lessons in the process. You learn to curb your impulse spending and make smarter financial decisions.
How to Build a Budget
Whether your current budget is not working for you anymore or you haven’t even tried to make a budget, it’s important to have a budget that fits your needs, lifestyle, and financial goals. Building a budget that works doesn’t have to be necessarily perfect at first try. For some people, starting a budget can be a painful process. However, you should keep tweaking your budget until it works for you.
Develop a Clear Picture of Your Finances
The first step in developing your budget is to come face-to-face with your finances. Get a pen and a paper and write down your income. You should list all your sources of income – your salary, business income, contract work, etc. Now, in another column write down all your expenses. Write down where your money goes (food, transportation, mortgage/rent, debts, utilities etc). Write the corresponding amount of your expenses and get the sum. Determine if your expenses are being covered by your financial sources. We will tweak your budget in the succeeding steps to attain this goal.
Become Specific with your Expenses
Being more specific with your expenses help you trim back on items should you still live above your means. Now on another sheet of paper, write down all your expenses, and itemize them one by one. For instance, you should write down how much you pay for electricity, phone, internet, and water bills rather than writing a rough estimate for “utilities.” Perhaps you could itemize your fun money into movies, dining out, small vacations, and gifts. Do so with all your expenses until everything is laid down to the smallest detail.
It’s also important to categorize your expenses as recurring, non-recurring, fixed, and variable. This is a great way to further establish a regular budget (monthly budget for example). Food, rent, transportation and utilities are recurring expenses while insurance can be paid annually so it’s non-recurring. To factor in your insurance into your monthly budget, simply divide it by 12 and set aside the resulting amount monthly. By the 12th month, you would have saved enough money to pay for this expense. Rent and mortgage are likely to be fixed expenses while groceries, gas consumption, and utilities may vary from month to month.
Don’t Forget your Savings, Debts, and Other Financial Obligations
Treat your savings, debts, and other financial obligations as expenses so you don’t accidentally leave them out of your budget. If they matter to you, then they should make it to your budget. Write down how much you pay for short-term savings (home projects, annual vacations, holidays, et.c) and long-term savings (retirement, kid’s college education, etc). Don’t forget to put your debts also (credit card bills, loans from family/relatives, and other consumer loans) as well as other financial obligations (tithes and donations to charity).
Cut Back from Your Wants
By now, you would have find out if your expenses outweigh for your income. Perhaps you want to increase your savings. This is when you need to cut back from your wants list. Looking back at your specific list of expenses, determine which items that you can give up easily. Perhaps you love going to the movies, but don’t mind eating at home than going to a restaurant. Perhaps you can find a better package for your cable, internet, phone bill, or even eliminate one or two of them. The important thing is you’ll still be able to live your life conveniently and comfortably without them in your budget.
Cut Back from Your Needs
If you want to be more aggressive with your savings, or pay your debts off faster, and have cut back on your wants, you can still free up some money by cutting back from your needs. Yes, you need a home, but your 4-bedroom home right could be costing you more in mortgage and maintenance. At this point, you may consider downsizing. It’s true that you need food, but you can switch out branded food products with generic ones if that means significant savings in the grocery.
Implement Your Budget
Your budget may already look good on paper, but if you don’t follow it in real life, it’s useless. It’s good to utilize budget software or phone apps so you can still consult your budget on-the-go. Make sure to follow your budget faithfully and perform the necessary tweaks as your life changes.
How to Make your Budget Work
Your budget may or may not work for you but what’s important is that you keep trying to figure out where you’re failing and fix it to make it right again. To make your budget work, it has to be:
Realistic – If you’re earning a meager income right now and you have some luxurious expenses, you have to scale back your budget so it’s more realistic. There’s nothing wrong with aiming high, but you also have to be realistic with your financial situation. As it improves, you can scale your budget up accordingly as well, if that’s what you want. What’s important is that your budget matches what’s truly happening in real life.
Measurable – You should be able to carefully measure the variables in your budget. If you’re saving up for a vacation, you should know how much you need and when you’ll take the vacation. Otherwise, you might end up saving less and rack up extra debt in the process.
Flexible – Your budget is not static. It changes as your life changes. Your budget is different when you’re still single to when you get married. It changes as you own a new home, grow your family, move with your career, and so on. You should be open to changing / adjusting your budget to better your changing financial needs, goals, and lifestyle.
Your budget is not always perfect and you may even stray from it at one point or another. This happens even to the best of us. Your budget may even be challenged by different financial issues and you might even get disheartened. Still, your budget is your number one tool in paving the way to your financial goals and putting your financial house in order. You just need to get back to it, determine what’s going wrong, correct it, and renew your commitment. It won’t be long before you find that your budget does work and it is directing you towards the path of financial commitment.
Cary Silverman is a consummate entrepreneur having sold multiple companies during his 20 years of business experience in the financial industry, but for him, it isn’t about the money. His success is rooted in his passion to focus on doing something better today than it was done yesterday. These days, he’s the CEO of Waldo General, Inc. that oversees the operation of King of Kash.