Abasiakan DennyBudgeting is a crucial skill to regulate your finances. Creating a budget is critical to managing debt, saving, and controlling spending. Budgeting helps you achieve your financial goals. Whether you’re a student, a professional or someone looking to take control of your finances, understanding budgeting will help maintain financial accountability. Here is a step-by-step guide to budgeting.
Step-by-step Guide to Budgeting
This guide is to walk you through the basics of budgeting. You will track your expenses and save for opportunities or emergencies.
Calculate your Income
The first step to creating a budget is understanding your net income. Calculate your total income for a month after tax deductions. Add your net income from salary, workplace bonuses, side hustles, etc. Calculating your monthly income is crucial to creating a budget. For example, if your monthly salary is $6,000, $1,000 from workplace bonuses, and $3,000 from side hustles, your net income is $10,000 monthly.
List Your Expenses
Make a list of all your expenses. Prioritise needs over wants. Once you know your net income, the next step is to list your expenses. Group them into fixed and variable expenses. Fixed expenses are regular bills such as utilities, rent, subscriptions, etc. These are regular needs. Variable expenses on the other hand are costs that vary from month to month. Examples of variable expenses are entertainment, groceries, dining out, etc. Make a list of the fixed expenses and allocate the amount to them. Understanding where and what your money goes to monthly is crucial to financial accountability.
Categorise Your Expenses
The goal of categorising your expenses is to help you see the patterns in your spending behaviours. Categorise your expenses into needs and wants. Needs are what must be spent on. Examples of needs are food, transportation, healthcare, etc. Wants are non-essential expenses. Recreation, entertainment, luxury items, etc, are examples of wants. You can further streamline these categories in smaller and specific sets. For example, you can sub-categorise transportation into gas, public transit costs, etc.
Set Financial Goals
Set clear financial goals. Financial goals are a great foundation to achieving financial accountability. Group your financial goals into short-term and long-term. Short-term financial goals include buying a vehicle, paying off debt, etc. Long-term financial goals on the other hand are for future needs. Saving for retirement, your children’s education, etc, are examples of long-term financial goals. Ensure your goals are SMART (Specific, Measurable, Achievable, Relevant and Time-bound).
Create Your Budget
Now that you’ve calculated and categorised your expenses and set financial goals, create a budget plan. The budget plan you choose should align with your financial goals. There are two budgeting plans. These are the 50/30/20 rule and zero-based budgeting. In the 50/30/20 budgeting, allocate 50% to needs, 30% to wants and 20% to payment of debts or savings. Zero-based budgeting requires you to assign every dollar to a purpose. In zero-based budgeting, your net income minus your net expenses should equal zero.
Track Your Spending
Creating a budget is fantastic. However, you must track your spendings to determine your compliance with the budget plan. There are two ways you can track your spending. You can either make a daily account of your spendings or do it weekly. Monitoring your expenses will help you keep your spendings in check. If you discover a deviation, it’ll be easier to rectify it. Using spreadsheets, pen and paper or budgeting apps such as Mint is essential to track your spending.
Adjust Your Budget Regularly
Review your budget plan and make adjustments where necessary. Creating a budget does not mean you should be rigid. Changes in income and emergencies make this review necessary. Make adjustments in cases of overspending and make plans to stick to your budget. Consider reallocating funds if you spent more or have emergency expenses.
Budgeting is a critical step to financial accountability and stability. This guide will help you create a budget plan to manage your finances as a beginner. Listing your expenses, categorising your expenses, setting financial goals, creating a budget, and tracking your spending are critical to budgeting. However, you must be flexible and adjust where and when necessary.
