A budget is a plan for spending your money, and every successful financial plan starts with one. It is essential because it gives you control over your finances by helping you manage your spending, track your expenses, and save more money.
It will guide you towards making better financial decisions, get you out of debt, help prepare for emergencies, and keep you focused on your long-term financial goals.
The following are simple but significant steps to creating a personal budget.
- 1. Determine your monthly income
When creating a budget, the only income that matters is the take-home pay i.e how much you make after-tax. Make it as accurate as possible, including all other sources of income you may have, such as rental income, dividends, interests, or child alimony.
- 2. Total your expenses
Break down your expenses into two; fixed and variables. Fixed expenses, such as rent, transport, and loans, remain the same while variable expenses, such as groceries, shopping, and gifts, may change from month to month. Create a list of both your fixed and variable expenses and add them together. If the figure you get is more than your monthly income, you are living above your means.
- 3. Set realistic goals
Goal number one should be to cut down on your expenses if you are living above your means. But if your income is more than your expenses, congratulations, you can now start saving towards your goals.
To most people, money problems appear because we don't know what to do with our money, so we spend it randomly. To beat this, aim at setting clear and realistic goals that will help you achieve your plan.
Break them down into three categories: short, medium, and long term to better classify your goals. According to the SMART goal system guide, a realistic goal should be,
- 4. Separate needs from wants
Being able to understand your needs is a big step in setting a budget that actually works for you.
While needs and wants vary with each individual, it blurs the line when trying to separate between needs and wants.
Needs are what you need to survive, like food, shelter, clothing, and healthcare.
Wants, however, are things you like but that you can live without like, wanting to go out to dinner, so you don't cook, or wanting a new phone even though your old one works just fine. Correctly identify your needs, then prioritize them on your budget.
- 5. Review your budget regularly
Keep reviewing your budget weekly or whenever necessary to see how you can tweak or make adjustments to improve your it. But it’s best to keep it simple so you don't become frustrated with the details and give up.
While a budget won't work miracles, it can cause a significant positive change in your financial health. Stick to the budget you create today, and it'll amaze you how easily you break the paycheck to paycheck cycle, working yourself into a worry-free financial life!