Last Updated on February 22, 2021
Wondering how to create a successful budget and accomplish your financial goals? Well, you’re exactly where you should be!
Budgeting is highly associated with limited spending of money. Most of us end up adding “budget” to the list of words we hate. The truth is that a budget only guides you on how to spend your money.
It isn’t what you earn but how you spend it that fixes your class.
– Sinclair Lewis, It Can’t Happen Here
If you want to pay bills and debts effectively, have a little fun, and still direct some cash to your savings account, you need a proper financial plan.
A budget is a written plan showing income and expenses for a defined period. It gives you an insight into whether or not your spending habits match your priorities. Once you start budgeting, you may be surprised to know that some things in your daily or monthly expenses aren’t your prime concern.
Before you begin, visualize your current financial situation. It’s best to have in mind what you want to achieve within a set period. It could be in a month or a couple of years.
Step-by-Step Guide to Creating a Successful Budget
Here is a detailed guide to creating a budget that works:
Step 1: Determine your net income.
The first step in budgeting is to have an exact figure for how much you earn. Be as precise as you can in your estimation. Gather your financial reports to get a clear picture of your income. Bear in mind that it is your after-tax income we’re talking about and not your total salary.
The process of determining your net income is simple if you get a regular paycheck. If you have automatic deductions set for your account, you can add them back and include the expenses later in your budget. These deductions include money payable on 401(k) plans, insurances, and savings.
Regarding side hustles and any other income sources, deduct all the taxes and business expenses. Remember to use the lowest monthly earnings you ever got within the past year to be on the safe side.
Step 2: List all your monthly expenses.
List down all the expenses you expect to cover for the month. Most of them fall under the categories of housing, food, health, transportation, and utilities. Include any minimum loan payments so that the remaining cash goes into your savings.
For accuracy in finding all your monthly expenses, check your financial statements. These include bank statements, recent utility bills, credit card bills, and receipts. The more details you have, the simpler it becomes to create a successful budget.
Step 3: Determine your fixed and variable monthly expenses.
Start by determining all your fixed monthly expenses. While it’s unlikely to cut back on these, knowing the amount of money they take up each month is essential for a successful budget. Fixed monthly expenses include the following:
- Mortgage or rent
- Hospital costs
- Car payments
- Student loans
- Basic utilities
The next thing is to figure out your variable expenses. This kind of expense varies from one month to the other. Here, you can find something that isn’t needed in high quantities and reduce your consumption. You may alternatively take it off your budget. Variable expenses include the following:
- Car maintenance
Step 4: Calculate your monthly income and expenses.
Work out the difference between your income and expenses. If your expenses are lower than what you earn, you are on the safe side. You can easily put more of your money into meaningful investments and retirement savings. If you have any debts, use the extra money to pay them off.
Overspending comes in when your expenses are higher than your income. There are two options for you if you find this is the case in your calculations. You should either make more money or change your spending habits. It takes less effort to go with a reduction in spending.
Step 5: Adjust your spending.
Once you note that you are more of a spender than an earner or don’t like your expenditure, make some adjustments. Most of us spend money on non-essentials for fun. These expenses are the ones that waste money the most. They include movies, snacks, new outfits, vacations, and dining out.
Can you walk home instead of using a taxi? Is there a way to work out without paying for a gym membership? Maybe skip going to the club and have fun with your pet?
If you answered yes to any of that, go on and get rid of those non-essential expenses. Find out all the things you can skip for some time or eliminate from your expenses. By leaving them out of your budget, you can reallocate the money, save more, and pay off your debts.
The 50-30-20 Budget Rule
Avail up to 50 percent of your income for necessary expenses. As for the things you can live without, also known as wants, only allow 30 percent. You should reduce the “wants” portion if your monthly necessities take up over 50 percent of your earnings.
Be sure to leave some room for the costs you may have left out. This approach is also useful if one of your expenses turns out bigger than you expected. You can choose to spend the money if nothing unexpected comes up in the future of your budget.
The remaining 20 percent goes towards savings and payment of debts. You may have to prioritize one over the other. Choose the option that helps you achieve the goals that press you the most.
How to Ensure Your Budget Is Successful
It’s essential to keep reviewing your budget from time to time to ensure you’re on the right track. Change your budget when you get a new income stream, accomplish your dreams, or anytime your expenditure takes a rise inevitably.
Keep in mind that those aren’t the only reasons. Comparisons with your family and friends or anyone with similar goals to yours can also inspire changes in budgeting.
At this point, you know how to create a successful budget. So, you better get to it!