A budget is a system that allows you to plan for your income and expenses throughout a set period. Successful businesses have one thing in common; they budget their money and they do it because it works.
In this article, you'll see steps on how to manage your finance by putting together and sticking to a personal budget.
Why You Need a Budget
On a practical level, a budget helps you track spending and avoid missed payments. Budgeting can help you gain control over your money and allows you to prioritize your spending.
Below are factors to consider while preparing a financial budget;
The first step in creating a workable budget is to figure out your expenses over some time. Instead of focusing on whether you earn enough monthly, focus more on your monthly spending. The question you need to ask first is simple: where does my money go?
Irrespective of how much you earn per month, everybody has some fixed expenses (regular monthly bills) such as Transportation, Feeding, Utilities, Healthcare, etc. Begin by listing them and then list your variable expenses—those that may change from time to time, such as groceries, gas, and entertainment. This is an area where you might find opportunities to cut back.
Another important factor in creating an effective budget is by focusing on your income. To avoid overspending, you should focus on the net income instead of the total income.
If your expenses are more than your income, it's time to review your spending habits. When the expenditures are larger than the income, you have two choices: cut expenses or increase your income
Strategies to increase your income include getting a higher-paying job or getting a second job. Strategies to cut your expenses include eliminating impulse buys and cutting out planned but unnecessary purchases.
Make a list of your financial goals both on a short-term and long-term basis. Short-term goals should take around one to three years to achieve and might include things like saving for a vacation or renting an apartment.
Long-term goals, such as buying or paying off a home, saving for a child's college education, or a comfortable retirement, may take decades to reach. Once your budget is set, it’s important to review it and your spending regularly to be sure you are staying on track.
This is where everything comes together: your actual expenses vs. proposed expenses. 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.
You might choose to break down your expenses even further, between your needs and your wants. This difference becomes important when you’re looking for ways to cut down costs and redirect money to other financial goals.
In conclusion, everyone’s budget and financial priorities will differ and depend on individual circumstances. If you know why you’re budgeting, you’ll be more likely to want to go after it.
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