Budgeting is more than just dealing with money — it’s also about setting priorities in your life. A lot of people assume that having a budget would mean being frequently obsessed with every dollar you spend. But that’ll only tell you where your money went. It won’t tell you where your cash is headed in the future and why.
A budget is basically a spending plan you’ve made to meet your needs. You can choose anytime as to when you want to cut back. Budgeting is a powerful tool since it acts as a guide to your financial decisions and it ensures you reserve enough for what matters most to you. One of the first steps is tracking where your finances are. You can do this by hand if you like, but there are a ton of financial tracking apps that you can choose from – both web based and mobile/tablet based. Personally, I like mint and personal capital the most , though personal capital is a bit more geared towards investments than min.
Here are essential tips to show you how it can be done. All that’s needed is a bit of a time, a pen and paper, a spreadsheet or an internet-based tool to sort out the numbers.
Setting out your priorities
Your money should be headed to where it matters most. Set main goals that you find essential. It doesn’t matter which order they can be, whether it’s putting your kids to school, getting your home renovated, or shedding off that weight — all of them will be factored into the budget system. So jot them all down.
Gathering your documents
Begin collecting your latest bank statements, pay stubs, mortgage payments, utility bills, rental fees, insurance, and other important documents that indicate your personal spending or earnings.
Make your monthly earnings calculation
Jot down how much you want to earn every month — after taxes, since that’s an aspect you can’t control. If you happen to have an irregular income, look into your previous tax return and divide that by 12, or make an estimate on the minimum amount you’ll be earning over the upcoming year and divide that by 12. Never forget to add in income from dividends, tips, rent, or other sources. Jot down the total amount.
Add in deductions
Is your current employer deducting health insurance fees or retirement benefits from your monthly paycheck? Add them to your monthly income as you’ll be the one accounting for them in a budget.
Making the “Big Three” buckets
Decide on how much income you want to allocate for the “Big Three:” your needs, wants, and savings. If you don’t have a retirement savings or even an emergency fund, push your allocation to savings up to 20% (at the very least). Allocate around 50% to 60% of your monthly income to essential housing needs such as food, education, housing, and transportation. The rest will go to the things you want. Calculate how much you want to spend for each bucket.
Make a detailed list of your spending. Keep in mind your priorities, make an estimate as to how much should be spent to each of your needs and wants. Enforce one important rule: Never spend more than your monthly earnings.
Make comparisons and adjustments
This is basically your own reality check. Look into the spending plan you’ve made. Then compare it to your collected documents. If you feel you’ve left a major expense, include that to your budget.
Setting your system
It’s one thing to make a budget and another to stick to it. Make things simpler by making the process as automated as possible. Opt for online billing payments so you won’t have to deal with balancing a checkbook or seeking for stamps. If you feel you’re more into the old-fashion approach by keeping your expenses in envelopes, then set it all up.
Checking back in
Your primary goal is to make sure your spending is roughly on the same path as that of your spending plan. Once every month, spend several minutes looking into your financial goals and flows. Then make adjustments if needed.
Once every year, re-visit your priorities and budget so you can ensure it still meets your goals and what you want to get out of life.
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