Some people religiously stick to a budget. They never over spend and have a nice cushion in case of emergency. For other people it’s a challenge every month. Still others don’t use budgets at all. If you are from that last category, What is a budget and why should you budget?
A budget is a financial plan. It tracks your spending and income to make your dollars stretch the farthest. Budgeting helps you keep track of all your money, meaning that you are less likely to overspend and have to go into debt. It can help you eliminate useless spending by drawing attention to it, in other words it helps prioritize expenses. Therefore the most important things get paid and other things wait. If you have already fallen on some financial troubles and gone into debt, budgeting can help to eliminate that debt as fast as possible.
Have you ever heard the phrase “don’t work harder, work smarter”? The same can be said about money. When buying something new, don’t spend more, spend smarter. Spending smarter can mean saving up for something big. It can mean not going to an expensive restaurant and buying something else with that money. Spending smarter means knowing where all your money is going, and making conscious decisions about each transaction.
So, you’ve decided you like the idea of being in control of your money and spending smarter. It’s time to create a budget. Creating a budget is unique to your financial situation and goals. Don’t download some budget off the internet and try to follow that. Although there are some helpful tools and apps out there, someone else’s budget will not work for you. You need to come up with your own budget.
Unsure how to start creating a budget? First things first, recognize your goals. What exactly is budgeting supposed to help you with? Are you trying to save up for a new car? Or maybe you need to get out of debt. Maybe you just want to be more aware of your finances. Whatever it may be identify your goal.
Remember when creating a budget to start early. You’ll want to know what you can and can’t spend before the situation arises. First you’ll need to do a bit of research. Figure out your income. By income I mean what you actually get to take home and spend after taxes and other things come out of your paycheck. Open a budgeting app or tool, or just use excel or even just a piece of paper to keep track of the numbers you are about to write down. At the top put your income. Then start writing your expenses.
Start with the fixed ones. Meaning anything you spend the same amount on each month. An example could be rent or mortgage, phone bill, or anything else that is always the same. After you’ve written down those, write down everything else that you need to pay every month. Such as utilities, groceries, etc. Guess about how much you will have to pay on those based on previous months. It’s better to estimate a little high so if it’s higher than you think it won’t go over budget. This is creating a cushion. A little extra money that you may or may not need, but is there just in case.
Once you’ve written down everything you need to pay you can start writing down things you’d enjoy spending money on, like eating out, buying something fun, or going to the movies or on a trip. Remember, not every month will have the same expenses, particularly in this category. Some months you may want to budget some money to go skiing, others money for a water park. If you have children in school they will need new school supplies around August, but not other months. Tailor your budget to your circumstances each month.
Now that you’ve written down everything, you’ll need to make sure that you won’t be over spending if you buy everything on your list. Add up your expenses. Are they less than your income? If so great! If not it’s time to start prioritizing. Obviously the things that you can’t go without spending come first. These things are house payments, car payments, insurance, and the like. Secondly, take a look at the money that you want to spend on fun. You can only do as many as you have money for, so pick your favorites, and remember, next month you can rebudget. You aren’t giving up skiing forever, just for the next month while you focus on other things.
If debt is your issue, then paying some each month towards your debt should have top priority. Also remember that you budget from zero. Once the money is gone, there isn’t anything left. This will keep you out of further debt, by not overspending more. Because life happens, you may want to budget some money towards savings or emergencies. That way if something does come up suddenly you don’t have to go into debt to pay for it.
Don’t forget to write down everything you spend, all the time. If it goes unaccounted for you are overspending. If writing it down isn’t enough and you still have trouble controlling yourself when spending there are strategies for you. You can withdraw the exact amount of money you have to spend that month in cash. Put it in envelopes according to what it is used for. This way you can see where the money is going. This method is also helpful for some because once there isn’t any money left in your envelope, there isn’t any money left. This way you can’t spend more than you have.
However you do it, budgeting can give you back control of your money. It lets you really understand and control where your money goes. Whether easy or hard for you budgeting will help you reach your goals through simple steps.