Are you looking to manage your finances but don’t know where to start? Well, creating a budget plan is the first step to determining how your money is spent, putting you in control of whatever money you have. With the budget plan in place, you should be able to live within your means and have something to save for a rainy day. The only trick here is to come up with a budget that works best for you. Outlined below are a few tips and steps to help you come up with the perfect budget.
Step 1: Know Your Net Income
Are you salaried, working part-time, or work freelance with an irregular income? Whatever your income is, you need to calculate your net income, or at least average income, to come up with a reliable and working budget. Be to subtract all deductions (taxes, social security, 401(k), and spending allocations) from your gross income when creating the budget plan. It’s only after all the deductions have been made that you will have something concrete (net income) to work with. If the final number seems less than what you anticipated, picking up a hobby or talent to supplement your income might help a little.
Step 2: Keep Track Of Your Spending Habits
The next step to creating the perfect budget plan is to identify your expenses and categorize them accordingly. Listing all expenses you might have makes it easier to see where most of your money goes and the best areas to reduce or cut spending altogether. Fixed and recurring expenses need to come first on your list of expenses. These include utility bills, mortgage, rent, car payments, and loan payments, among others. It might be almost impossible for you to cut down on fixed expenses, which is why these need to be in a category of their own.
You can then create a list of all expenses that aren’t constant and those that can be adjusted to save some money. These include gas, groceries, entertainment, and individual lifestyles. You could use your bank or credit statements to see where most of your money goes, especially for variable expenses. Most banks and credit card companies itemize monthly expenditures, making it easier for you to track essential and non-essential expenses with ease. Going the ‘old school’ way and recording all your daily spending on paper can also help keep you abreast with your expenditure. There are plenty of budgeting apps and tools that you can take advantage of as well.
Step 3: Set Realistic Goals
According to financial experts, you need first make a list of all the financial goals you wish to achieve before creating a budget plan. Once sure of your net income and expenses, you can start drafting your short- and long-term goals. Long term goals take years to achieve, while short terms can take less than a year to accomplish. Saving for your child’s education, retirement, or a second home, are examples of long-term goals, while saving up for a new TV, couch, or house renovation are short-term. By setting goals, you will be able to plan ahead and even see where you can cut your spending to make it possible. Sometimes you will have financial emergencies that are unforeseeable, take out a small dollar loan and ensure to pay it back to stay on track with your goals.
Step 4: Create a Plan
With the list of fixed and variable expenses ready, drafting the budget will be much easier. Start by calculating//summing up all the fixed costs to have an idea of how much is needed. Take time to determine/predict your variable expenses, as these may change or even be eliminated. Consider breaking the list of variable expenses farther between needs and wants. Wants are the things you can do without, while needs are what you need to survive. An excellent example of a need is food, or even gasoline if you drive to work every day. A streaming service subscription, for example, is a want that you can choose to cancel or scale down. Making even the smallest adjustments to your wants and eliminating unnecessary ones could see you save lots of money in the process.
Step 5: Make A Few Lifestyle Changes
Documenting your expenditure against your income should leave you with some money, most of which is from eliminated expenses. The balance is what you can then save to make your goals a reality. Eliminating some wants can also see you save more money in the process. Consider watching a movie at home instead of going to the cinemas. Switching to preparing your meals, instead of eating out, or using public transport from time to time, can free up some of the much-needed money, allowing you to accumulate savings even faster.
Consider adjusting your fixed expenses if the numbers don’t add up. A few sacrifices will have to be made to live within your income without accumulating debt. Moving to a cheaper house, for example, might free up a good chunk of money that can go towards accomplishing both short- and long-term goals.