According to Development Aid, poverty represents one of the most serious problems in modern society.Clearly, many people are struggling financially. With the cost of living being on the rise each and every time, we need a solution that will prevent us from getting poor and survive the swaying of the financial crisis that we currently are at. Budgeting can help you feel more in control of your money and make it easier to save for your goals.
In this post, we will talk about what budgeting is, why it’s important and the steps you need to follow for budgeting as a beginner. As a bonus, I will be gifting you with a monthly budgeting plan that you can download below!
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What is a budget?
A budget plans future saving and spending as well as planned income and expenses. In other words, it’s an estimate of how much money you’ll make and spend over a certain period of time, such as a month or year. You don’t have to have the money that you have budgeted for at the time. It can be a future projection of how much money you will have. Also, you can budget for the money that you currently have. It all depends on where you are financially.
What are the benefits of budgeting?
The importance of budgeting cannot be overemphasized. It is the lifeblood for financial security. Below are some of the reasons why budgeting is important.
- A budget helps you figure out your long-term goals and work toward them. Budgeting forces you to set clear goals, plan out how you will achieve it and track your progress towards achieving your financial goals. If you meander through life without a budget, spending your money on anything that catches your eye, how will you be able to buy your dream car or build your dream house?
It ensures you don’t spend money you don’t have. We are living in a generation where we have credit cards. This means that one is able to spend money that they don’t have. However, having a budget ensures that you are living within your means and you are not just spending money on whatever you like.
- It helps prepare for the future. When you have a budget, you are not only securing your now, but also your future. Saving is critical for your future. Putting money aside every month will ensure that you have a happy retirement. Although you may have to sacrifice a little now, it will be worth it down the road.
It Helps You Prepare for Emergencies. Life is full of unexpected occurrences. You might lose your job today, get sick, get a divorce or get into an accident. All these emergencies need some extra cash from your normal daily spending. Budgeting helps shield you from such occurrences. Your budget should include an emergency fund that consists of at least three to six months worth of living expenses. This extra money will ensure that you don’t spiral into the depths of debt after a life crisis. Of course, it will take time to save up three to six months’ worth of living expenses.
- Building a budget forces you to take a close look at your spending habits. You may notice that you’re spending money on things you don’t need. Budgeting allows you to rethink your spending habits and refocus your financial goals.
What are the steps to take to start budgeting for beginners?
1. Identify how much money you make
It is important for you to know what your net income is. That’s your take-home pay—total wages or salary minus deductions for taxes and employer-provided programs such as retirement plans and health insurance. Focusing on your total salary instead of net income could lead to overspending because you’ll think you have more money than you do. If you do not have a consistent source of income, you need to estimate your income over the previous three months and use that as your baseline. This will help you to create a budget around the money that you make. Do not include overtime pay, because you shouldn’t rely on that as regular income.
2. List your expenses
Begin by recognizing all of your fixed expenses, the monthly expenses that you absolutely must pay, including things like student loan payments, data, groceries, gas, car payments, insurance, utility bills, and rent. If the costs for any of these tend to vary, then determine the average cost over the past three months and use that figure.
Add up the costs of your fixed expenses, and you can see your total monthly financial obligations. Then, subtract this number from your monthly income. That will let you know how much money you have left over each month for unrestricted spending and financial goals.
Next list your variable expenses—those that may change from month to month, such as groceries, gas and entertainment. This is an area where you might find opportunities to cut back. Credit card and bank statements are a good place to start since they often categorize your monthly expenditures.
3. Set your financial goals
Next, it’s time to set your financial goals.This is important because it helps you put a plan in place that prioritizes what’s most important to you. You can set short- term or long-term financial goals. Short-term goals should take around one to three years to achieve and might include things like setting up an emergency fund or. Long-term goals, such as saving for retirement or your child’s education, may take decades to reach. Remember, your goals don’t have to be set in stone, but identifying them can help motivate you to stick to your budget. For example, it may be easier to cut spending if you know you’re saving for a vacation.
4. Identify things that you spend your money on that you don’t need
Examples include going out to eat, buying gifts, taking vacations, purchasing new clothes, and attending movies or shows. After you’ve allocated money in your budget to your obligations and your long-term financial goals, how much do you have left over? This is what you have available for your entertainment and other discretionary spending.Make sure to limit these costs based on what you can afford according to your budget.
5. Create a plan
This is where everything comes together: What you’re actually spending vs. what you want to spend. Use the variable and fixed expenses you compiled to get a sense of what you’ll spend in the coming months. Then compare that to your net income and priorities. Consider setting specific—and realistic—spending limits for each category of expenses.
So far, you have an idea of what each section of your budget looks like — monthly obligations, discretionary spending, and financial goals. Now, it’s time to get the full picture. Add up your total expenditures for all three categories, and then subtract that number from your monthly income.
If the result is a positive number, that means you’re bringing in more money than you’re spending. If that’s the case, then congratulations, you have a surplus. You can put this extra money in savings, or use it to bolster your other expenditures. For example, you can make an extra payment on your student loans, or you can put the money toward a vacation fund.
If you come up with a number close to zero, you have just enough money but no margin for error. This can be a problem if something comes up that you weren’t planning for. In this case, consider adjusting your budget a bit or finding ways to lower your monthly expenditures to give yourself some wiggle room.
If you get a negative number, that means it’s time to take a hard look at your budget: You’re spending more than you earn. The best way to adjust your budget is to decrease the amount that you’re spending each month on things you don’t absolutely need. Needs should always come first when constructing and maintaining a monthly budget.
6. Adjust your spending to your budget
Now that you’ve documented your income and spending, you can make any necessary adjustments so that you don’t overspend and have money to put toward your goals.
7. Review your budget regularly
Once your budget is set, it’s important to review it and your spending on a regular basis to be sure you are staying on track. Few elements of your budget are set in stone: You may get a raise, your expenses may change or you may reach a goal and want to plan for a new one. Whatever the reason, get into the habit of regularly checking in with your budget following the steps above.
If you’re just beginning and have never created and maintained a monthly budget, then you’re not alone in thinking this can be overwhelming. The first few months may be tough, but it can put you on the road to a much better, organized, and happier personal finance situation. I created a monthly budgeting plan that you can use that is FREE when you download it down below.
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