Practical guide to budgeting
Nicholas is co-founder of Economic Street. He is passionate about getting people to become financially independent and economically aware of their personal finances, enabling them to make better financial decisions and avoid becoming entrapped in the cycle of debt.
1. Budgeting allows for financial planning
2. Budgeting is not just for people on low income
3. Different tools can be used for budgeting
4. Budgeting do's and dont's
5. Budgeting habits change
Budgeting allows for short term and long term planning. Budgeting can help to save for retirement, emergencies such as buying a new washing machine, a new car or just about anything. For some, having a solid budget in place, knowing how much money they have and knowing exactly where that money is going makes life a lot more comfortable.
Budgeting is not just for when you are short of money but can be a tool to help at all times to be able to give you that financial independence. Preparing a budget there are many ways to set up a budget the most basic being a pen and paper.
Smart phone apps or my personal favourite excel spreadsheet, an excel spreadsheet allows for easier day to day managing of your budget and updating accordingly. First place to start is to note down all your monthly income you receive if it's from your pay note down your after tax income. Then you need to note down all your outgoing expenses from your fixed expenses mortgage/rent work travel and variable expenses such as food day to day living, also try to plan for occasional expenses such as birthdays, xmas, car insurance, car tax and any debt expenses you may owe i.e. loans credit cards and make room for any savings if possible. Be as truthful and accurate as you can. You only be lying to your self at the end of the day.
When you're getting used to budgeting for the first time, it's helpful to know how to manage and stay within your budget. Most importantly, allow yourself to be flexible, if you want to spend more on one month, just spend less in another area to compensate. Don't expect to always stick within the amounts that you set for yourself as guidelines when you first created your budget. Make sure to leave room in your budget for some things you enjoy no matter how small.
Always make sure, however, to keep spending below your income. Special events like birthdays and holidays should also fit into your income. Rather than pile them on a credit card. Don't go into debt for things that are not assets (An asset is a resource with economic value that an individual, owns or controls with the expectation that it will provide future benefit.
Budgeting isn't just for people on low incomes or for times when money is tight or your life is undergoing a major transition. Budgeting is for everyone because it makes it easier to achieve financial goals of all shapes and sizes, whether that goal is to stay out of debt next month or to pay cash for family holiday.
Budgeting allows you to make long- and short-term projections about your financial situation, prevent crises, get the most out of your money, plan for major life changes and enjoy peace of mind. Through budgeting you begin to develop a habit of saving. Getting a basic sense of your financial picture is an important component of budgeting. Make sure you know how much you make after taxes and how your required and optional expenses fit into that picture.
Avoid budgeting mistakes like being so penny-pinching it makes you miserable or ignoring the time value of money. Being flexible with your budget categories and allowing yourself affordable rewards will prevent budgeting from being a drag and help you stick with it. A well-maintained budget can help you meet short-term goals, like saving for a holiday, as well as long-term goals, like saving for a house.
A budget should evolve as your circumstances change. Don't expect the budget you made at 16 to still work for you at 30 or even 21. Your income and expenses will change over time, often annually. For example, if you get a raise, you'll want to adjust your budget to reflect how you want to spend or save the extra money.
If your spending is too high for your income, a budget serves as a reminder that you need to change things - and the sooner you listen to those numbers, the better off you'll be. Living pay to pay only works temporarily - sooner or later you will have an expense you can't meet or a goal you can't achieve if you don't learn how to budget. As long as you're spending within your means each month, a budget is a great tool for helping you sleep soundly at night. You know where your money's going; you know that you're on track to meet your financial goals.