Create and Maintain a Budget
What is the purpose of a budget? The purpose of a budget, simply put, is to help you plan for your financial future. A budget puts your money to work for you. A budget is key in paying down debt/eliminating debt and creating more cash flow. A budget allows you to forecast your income and expenditures months in advance. A budget allows you to plan for the future. A budget allows you to monitor your financial performance.
Steps to Budgeting:
1. Know where your money is going
Before you begin budgeting, you need to know when your finances are going. I suggest inputting all of your expenditures over the last three months into an excel spread sheet or financial software such as QuickBooks. This will help you to determine the categories where you spend money as well as the actual amounts.
I also suggest tracking all sources of income for the last three months as well. If you have an hourly job, or make commission, etc. Its helpful to have a general idea of about how much income you pull in monthly.
The idea behind a budget is to keep your expenses below your income level. This will allow you to stay in control of your money, staying out of debt, and starting to plan for your future.
Income, is the amount of money you having coming in. When budgeting it’s easy to get frustrated thinking the problem with your budget is lack of money. I can assure you that most any income is livable. You just need to learn to live within your means.
Expenses, are the expenditures you have going out. Regardless of how much income you make it’s always a good idea to try and trim the fat(expenses) off your budget. Look for expenses you may want but don’t necessarily need, these should be the first things you eliminate from your budget.
2. Determine Your Financial Goals
When creating your financial goals it’s a good idea to dream, great in fact! However, stay realistic when it comes to your expectations for your budget and financial goals.
Start with small goals and gradually build them up. Nothing will wear out a budget’s zest quicker than repeatedly broken promises.
The following are three of the best financial goals everyone needs to be incorporating into their budget.
- Eliminate Debt
- Plan for the Future
3. Pick a Budget to Follow
Once you have determined your financial goals, it’s time to pick a budget plan that works for you.
When creating your budget, plan ahead! Look down the road at all possible upcoming events, special occasions, large bill payments, etc you may have. By including all possible large expenditures into your budget you’ll eliminate a spoilage of your budget when they roll around.
Plan to keep some sort of savings. As of late I have heard a large number of people tell me that ‘money is for spending!’. This is true to a certain extent. However, if any of you have had to use your ‘rainy day funds’ (yes savings are called this), then you understand the importance of having a savings. Savings allow you a cushion during months of unplanned expenses, in the event that you lose your job, etc, etc.
Whichever budget style you choose to go with, remember to keep it simple. Don’t over complicate your budget. Stick to the basics and you’ll succeed.
a) Basic Budget
A basic budget allows you to set any amount you choose(preferrably based off of your three month money tracker) into each of your expense categories. This money can be set aside for bi-weekly or monthly expenses, depending on what works best for you.
After all your needs(expenses) and wants are met, all extra funds go towards debts, savings, retirement, etc.
b) 50/30/20 rule
The 50/30/20 budget is broken down into the following:
- 50% of your income goes to necessities(I include my charitable contributions in this category)
- 30% of your income goes to wants(yes we need to budget for wants)
- 20% of your income goes to savings/retirement/debt elimination
c) Irregular Budget
When you are working with an irregular budget you will want to list your expenses in need of priority. Pay off items in order of priority as income comes in. When you finally reach the ‘green(money left over after expenses), set aside funds for misc categories such as groceries, clothing, savings, etc.
An example of when to use an irregular budget are for jobs that are commission only or jobs that paid per job. Irregular budgets take a little bit more juggling, but are just as doable as any other budget.
4. Follow Budget
A great bit of advice when it comes to following your budget is to find deals and coupons for things that you NEED. So many times can get caught in the trap of finding amazing deals for things that we don’t REALLY need.
When you go shopping, be sure that you make a list ahead of time. Stick to this list and it will help to ensure that you only buy the things you need.
Buy non-name or store brand items. This will help to lower your costs tremendously.
Steps to Maintaining:
Creating a budget is the easy part, it’s sticking to it that’s the hard part. Here’s a secret that I’ll let you in on; if you want your budget to work, you have to follow it.
Here are a few tips and tricks to help keep your new found budget on course.
When you are tempted to splurge and buy that amazing something or other that you just have to have, but really you’ve been living without this entire time; take a look at your financial goals. Will this purchase set you back from accomplishing your goal? Is it worth it? Do you really need it or is this a want item?
Re-focusing your attention to your long term goals will help you put your budget back into perspective.
2. Re-evaluate Income and Expenses Weekly, in Order to Make Changes and Updates to Your Budget.
When you misjudge your expenses or income it’s easy to become discouraged and throw in the towel on your budget. Don’t. Budgets are like a good steak. They take time to marinate in order to get the best flavor out of them. Budgets take time, patience, and tweaking.
If you fail one month at your budget, re-evaluate your budget and make changes for the next week or month.
Your expenses and income will shift periodically due to job changes, unexpected expenses, etc. This is part of life. Be prepared and adaptable.
3. Enlist Help
If you constantly find yourself loosing the budgeting battle it may be a good idea to enlist in some help.
Take a finance class at your local college, attend a financial seminar, or enlist the help of a financial advisor to keep your finances on track.
Help is available to you in so many forms. Take advantage of them and make your financial goals and dreams a success.
Conclusion:(Create and Maintain a Budget)
Put your money to work for you by getting it on a budget. Not only will you have peace of mind knowing where your money is going, how much you have, and what expenses you have coming up. You budget also gives you the capability to plan for the future. Whether this is planning for a next big investment or planning for retirement; a budget is the first step towards making these possibilities, realities.
Are you currently on a budget? Share your tips and tricks for creating and maintaining a budget in the comments box below.