Budgeting is the cornerstone of effective financial management. Yet, it eludes many people. Some find budgeting a daunting experience, while others don’t understand budgeting altogether.
Budgeting is basically a plan to spend your money. It shows if you are spending more than you are earning. It can enable you to use your money more effectively by allowing you to direct it where it is needed the most. Budgets allow you to do that by highlighting your spending habits.
Perhaps the first step to building a budget is to set your financial goals. Is your goal to save money? Is it to pay off credit card debt? Build an emergency fund? Save for a down payment on a house? These are just some of the examples of financial goals.
Once you have established your financial goal(s). You will have a clear understanding of what you want from your budget. Be sure to set realistic goals. Building a budget that is out of your reach has no value and serves no purpose. Start with a realistic budget and work your way from there.
Once you have identified your goals the next step is to identify your income and spending. Identifying income should be simple for most people. List all of your income streams. This is the easy part. Identifying your spending is the hard part.
If you have never built a budget before it is likely you have limited knowledge of your monthly spending. The first step would be to write down your fixed monthly expenses. These could be rent, mortgage, car loan, insurance, and so on. Now think of any other expenses that occur on a monthly basis that is not fixed, not essential. Include all these expenses in your budget as a starting point.
Once you have identified your income and spending, compare them both. Are your expenses more than your income? If so, then you must look for ways to reduce your expenses. If you are looking at ways to cut your spending, don’t assume that you can find savings from eliminating your morning coffee or some other expense that forms a small percentage of your total expenses. You have probably heard “Penny wise, pound foolish”, this is an important lesson. When building a budget don’t take the ‘penny pinching’ approach. Think about the expenses you want to control and how they impact your finances in the long-term.
Be sure to identify your essential and discretionary spending. Look at your big expenses, see if there is any way to reduce or eliminate those expense. Once you have done that, you can then look at smaller expenses to fine tune your budget.
Remember, budgeting is an ongoing process. It will take you a few months build the right budget.