Are you the type that always has an outstanding high-interest debt that you can find ways to pay up? Do you often over withdraw what you have in the bank because of unnecessary expenses? Do you find it difficult to understand where most of your money go? If the answer to any of these three questions is a big YES, then you definitely need a budget. The year has just begun and most people have started working on their new year’s resolutions. You too can include budgeting in your new year’s financial resolutions. It’s what you need to save up towards your kids’ education, your family’s health fund, and for your retirement.
So often, people make budgets that don’t work and so they end up giving up on the idea entirely. You don’t have to. The problem with such people is that they make a budget that is too restrictive and so it becomes scary to even look at, let alone try it. The truth is that a budget is supposed to discipline you financially but not to punish you. The moment you understand this concept, it becomes easier to create a budget that you can stick to. To help you get started this year, here are basic steps to follow:
Step 1 – Finding the Ideal Budgeting Method
Before you pick up a pen and paper to organize yourself financially, you need to identify a perfect budgeting method. Essentially, there are three major considerations:
- The 50/30/20 Rule – This method allocates 50% of your money to basic needs, 30% to wants (fun), and 20% to saving. It’s ideal for people who don’t want to be too restrictive with their spending. It’s a simple but very effective rule that will help you to account for your money at the end of the year.
- The Zero-based Method – This method works on the basis that every dollar has to be budgeted for and tracked. So, you are expected to assign a specific task to each dollar that you have whether it’s for a need or a want. The downside is that it’s tiresome since you have to monitor each expense you incur.
- Envelope Method – This method is specifically for those people who naturally overspend. You need it to hold yourself from being extravagant. In this case, you are required to withdraw all the money for the month in cash and put it into individual envelopes. For example, you can have envelopes for groceries, mobile expense, gas, travels, and fashion. If money in a particular envelope runs out, then you’ll have no other option than to wait till the next month.
Step 2 – Selecting the Perfect Tracking Method
For your budget to work, you have to find a way to plan and monitor it. You can do it using:
- A Spreadsheet – All you need here is a pen and paper. You’ll then need to make a worksheet that defines your monthly spending.
- A Budgeting App – You can use mobile apps like Personal Capital, Pocket Guard, and Mint. They can help you break down your yearly expenses. They are free to use and very much straightforward.
- A Bullet Journal – This one serves the same purpose as the worksheet method; only that it’s more organized.
Step 3 – Establishing After-Tax
Before you can budget for any money, you need to establish how much you really have. Remember, a tax is a deduction that reduces your income. You need to calculate the after-tax as it’s what you need for the budget. If you are employed, you don’t have to calculate it as it’s done for you. You just have to look at your paycheck to see it. If you are self-employed, you’ll need to add up all income sources for a particular month and then deduct the relevant taxes. What you remain with is what we call after-tax.
Step 4 – Determining Financial Goals
Before anything, you need to have clear financial goals for the year. First, you should identify all your needs for the month so that you can allocate to each of them a specific amount. You should have enough money for food, clothes, shelter, and medical care. Second, you need to figure out the best way to save up. Your goal may be saving towards retirement, education, buying a home, or starting a new business. Lastly, you should break the goals into short-term and long-term objectives based on your financial position.
Step 5 – Setting Up Financial Priorities
Once you have established your financial goals, the next thing is to prioritize them. What do you want to achieve fast? Is it building a house, saving up for retirement or starting a new business? You need to set up clear priorities. For example, you should first clear high-interest debts before other debts as they may offset your budget-making plans. You should also consider setting up an emergency fund to protect your family against life’s uncertainties before you start saving towards building a home.
Step 6 – Learning to Say No
Working with a budget doesn’t mean that you can’t have fun, more so when following the 50/30/20 Rule. However, you don’t have to overindulge. You’ll have to say NO to a lot of your favorite things such as a weekly lunch date with friends, lots of junk food, and buying the most expensive jewelry. If the money that you set up for the wants is not enough to cater for these expenses, you don’t have to sacrifice your savings. Just drop them. You can do without them now but you’ll need your savings at a later date. It’s just a matter of disciplining yourself if you are looking to stick to your budget.
Step 7 – Revising the Budget
Lastly, no one said that your budget is nonadjustable. You need to take some time to see what is working and what isn’t. In the latter case, you may find it necessary to make adjustments. Actually, there’s nothing like a static budget. Thus, you are expected to revise it occasionally depending on your after-tax and spending power. It’s also an opportunity to track your expenses to determine if they match the allocations on your budget. Monitoring the budget has to be a continuous thing. This will ensure you are always conscious of the spending.
This year, you need a practical budget to be able to have better control of your finances. Whether you are looking to save up or just to be financially responsible, a budget will help you account for every spending. While at it, seek all the financial help you can get from your advisors. It may go a long way in helping you make sense out of your budget.