Creating a budget is an important step in your journey towards financial success. Your budget is your road map and budget planning helps you to identify the bumps and potholes you will encounter on your journey.
It’s the middle of the month…you’re almost out of groceries, your phone bill is due and you’re wondering what you did with your paycheck. For the many persons that live paycheck to paycheck this is a regular occurrence, and I used to be one of them. By learning how to create a budget and sticking to it, I was able to put a stop to that destructive cycle. Make no mistake, it wasn’t always easy. But when you want to take control of your personal finances, you need discipline and sticktoitiveness.
I don’t know of anyone who wouldn’t be having some sort of money problem right now. But admittedly, persons are often reluctant to admit it. In this day and age where everything under the sun is up for discussion, I was surprised to find out that some things are still off limits. Admitting to others, even those closest to us, that we are having financial difficulties is still somehow taboo. However admitting it to ourselves is what’s more important. By acknowledging that we have a problem, only then are we able to take steps to overcome it. And that is where budget planning comes in. Budget planning is about making plans and taking action to ensure that you are spending your money in a way that best allows you to meet your goals. It helps you to identify your streams of income and make allowances for all your expenses, all with the aim of meeting your financial goals. When creating a budget, the aim is for your expenses to be less than your income. This is because you don’t want to be spending more money than you have coming in.
Identify all your streams of income: these vary according to your source of employment. If you receive a regular paycheck, you would use net income which is the amount that you take home after all the taxes have been deducted. If you are self-employed or have other sources of income, ensure that you record everything.
Create a list of all your expenses: write down all the expenses that you pay on a monthly basis. These usually include items such as rent/mortgage payment, water, heating, electricity, home insurance, medical insurance, life insurance, auto insurance, car payment, retirement savings, groceries and entertainment. The list could go on and on because while some expenses are typical, others vary by person…just know that your expenses are basically everything that you spend money on.
Break your expenses into categories: in essence your expenses should fall into two categories; fixed and variable. Fixed expenses are those that remain roughly the same each month. These include rent/mortgage payment, credit card payment, insurance payments, cable and internet and so on. Variable expenses are those that will change each month and includes items such as groceries, utilities, entertainment and gasoline. When creating a budget, you have the most control over your variable expenses. They are the ones on which you can cut back the most, although fixed expenses can be reduced to some extent.
Total your fixed and variable expenses and subtract from your monthly income: this should result in your total expenses being less than your income. If this happens, great! You’re off to a good start. This surplus can be used to pay down your debt even faster or go towards your retirement planning. If the result is that your expenses are greater than your income, then you need to go back and do some fine-tuning. As I mentioned earlier,when creating a budget the variable expenses are easier to adjust; so start from there and then move onto any fixed expenses that can be altered.
Track your spending: this is probably the hardest part and also the most important of your budget planning. Everything that you have done, that have led you to this point would be pointless if you do not track your spending. By keeping track of your spending you are able to stay within your budget and can review how much you spent during the month so that you can make any adjustments to next month’s budget, if necessary.
Review your budget every month: revision is an important part of perfecting any process. Each month review your budget to compare what you spent versus what you had budgeted to spend. This will reveal areas in which you did well and also ones in which you will need to improve. This is especially important if you are a business owner, because missing budgets means missing payroll, which is never good.
After a couple of months, this review process will not have to be done as regularly as you get better at sticking to your budget.
Budgeting software: everything is now automated and anything…well almost anything can be done online. Budgeting software has made creating a budget and budget planning easier and more manageable for some persons. There are numerous budgeting software available; some are free while other are not and some can be used offline while others can only be accessed while online. Choose one that best meets your needs in budgeting software and one that helps you without making the budgeting process any harder than it has to be. Roll up your sleeves and start creating your budget. It’s hard work but someone’s got to do it…and you’re the best person for the job. Budget planning is a big part of organizing your finances and taking control of your financial future.