How to Effectively Create a Budget

How to Effectively Create a Budget | AndThenWeSaved.com

Most people find creating a budget a daunting thought – I know I did. In reality, though, it doesn’t have to be. After going through a stereotypical phase in college where I constantly was “broke”, I learned budget creation and management was actually quite straightforward. Once you understand how to go about it, you will find making a budget is actually a set of logical, quite easy to follow steps. Here are the basics of efficient budget creation.

How to Effectively Create a Budget … 

 

Monitor your spending

Before you actually make a budget, the very first step is monitoring your spending. It makes no sense to assign some arbitrary numbers to your expenses, and then try manipulating your spending to fit those numbers. To track your spending, take note of how much you spend in a given month, including everything from regular expenses such as groceries to more spontaneous spending. For this, you could use an Excel spreadsheet. Personally, I prefer using apps such as Mint and YNAB – these allow me to see where my money is going at the touch of a button.

 

Sort your expenses

Now that you have an idea of where your money is going, try sorting out your spending. I started by sorting my spending into two easy categories – “fixed costs” and “flexible spending”. Fixed costs include things you will spend on each month, with little variance in the amount. These could be rent or mortgage payments, phone bills, internet bills, car payments, gym memberships, etc. Flexible spending consists of spending on things that can vary from month-to-month. For me, this involved eating out, shopping and entertainment. Once you have this down, compare your fixed costs and your flexible spending.

 

Consider your monthly income

A surprising number of people don’t consider their monthly income while making a budget, causing them to overspend without realizing it. We’ve all experienced the urge to spend more than we can afford on a pair of new shoes or splurge on an extravagant meal. More often than not, this leads to overspending, throwing your budget completely out of whack. I know this may seem like restating the obvious, but the whole goal of budgeting is so you don’t overspend. So it really is integral to take your income into account!

 

Consider your financial goals

The next step is writing out any and all financial goals. Do you want to pay off a loan by a certain time? Do you want to buy a new car? As an avid scuba diver, my main goal was saving up for a diving vacation within the year. Being aware of this encouraged me to stick to my budget and save where I could, especially because going on a scuba adventure was something I passionately wanted. Knowing your goals will help you define your priorities and also keep you motivated to abide by your budget. As stated by Martin Siesta, a Certified Financial Planner, “You can’t have everything you want, but you can direct your dollars toward things you want the most.”

 

Consider your savings

It’s always a good idea to save for a rainy day. Most financial planners recommend setting aside three to six months’ worth of living expenses as an emergency fund. While I certainly didn’t think about this too much in college, you also might want to consider setting aside a certain portion of your monthly income toward retirement. This is especially important if you have plans to retire in another city, or even abroad. Research shows that can be quite expensive and requires advanced planning. For me, savings involved having a cushion in case I fell ill and wouldn’t be able to work. Depending on your current situation, you will have to determine your savings, heir amount and their purpose.

 

Put it all together!
Now that you’ve considered the main aspects of your personal finances, you need to put it all together.

First, allocate an amount to all of your fixed costs such as rent, monthly bills, etc., based on your actual spending. Then do the same for your flexible spending.

Personally, I like allocating a lump sum toward groceries, even though the amount I spend varies by month. I always choose a figure that’s a little higher than what I usually would spend, knowing I always can put the remainder into my savings. Second, allocate a certain amount to meet whatever financial goal you have chosen. Finally, based on what you have left, allocate a certain portion of your income toward your savings. It’s a good practice to put this portion of your income into your savings before spending on any other miscellaneous expenses. This was hard at first, but after a while, contributing to my growing savings became a force of habit. Watching my savings grow soon started giving me a sense of satisfaction. Even though it may not seem this way at the start, trust me when I say it is worth it to set aside a portion of your income toward your savings. Ideally, this shouldn’t harm your budget since this portion was allocated while keeping in mind all your expenses and goals.

 

If your expenses are exceeding your income, then you will have to find areas where you can cut down on your spending. Most likely, you will find some places in your “flexible spending” or “extras” where you will be able to save some money. Maybe this means cutting down on shopping expenses, or going to the movies less. There are many ways you can save in your daily life – everything from saving money on your car to saving on electricity. I saved a significant amount of money simply by making coffee at home rather than grabbing it to go on my way to class and/or work! Alternatively, if you find your income largely exceeds your spending, don’t go on a spending spree — put your excess income into your savings or use it to meet your goals. In the long run, you’ll be happy you did so. Even though budget creation may seem like a lot of effort, the time spent organizing your money is well worth it. Once you are past the initial obstacles, you’ll be managing your budget like a true pro!

 

What about you?  Do you have a unique way to budget or track your expenses?

Akshata is a 23-year old who is healthily obsessed (or so she believes) with all sorts of planning and management. She is interested in finance, entrepreneurship and tech. In her spare time, she writes about travel, food, and her daily doings at her blog The Happy Ranter.

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