Budgeting and living within your means is essential in all walks of life. It does not matter if you are a young couple hoping to save money for a wedding or a house deposit. Or if you run a thriving business with expansion plans; You must always have a budget you strictly adhere to.
Do you know how to make a financial budget? Once you have finished reading this easy how-to guide, you will learn how to.
Table of Contents
List All of Your Income Streams
Knowing exactly how much money you have coming in each month is the first step to any financial budget. Most people creating a budget have a job paying them a salary each month. So that is an obvious starting point.
You should list only guaranteed income streams because they are reliable. You may enjoy income from shares purchased on the London Stock Exchange. Or the New York Stock Exchange, but these are not 100% guaranteed.
Likewise, you may have income from a rental property, and profits from the best online Bitcoin betting sites. Or your employer may sometimes award a bonus. By all means, note these non-guaranteed lines. But do not create a budget that relies on money that may not materialize when you expect it to.
List All Of Your Expenses
Jot down everything that you spend money on during a typical month. It is easy to forget about you purchasing a newspaper on your way to work. Or a cup of coffee on your lunch break. But you must list every expense. Regardless of how seemingly inconsequential they are, they add up over the course of a year.
For example, someone who buys a $3 coffee Monday through Friday over the course of a 50-week working year is spending $750. Throw a $1 newspaper per day, which is another $250 per year, for a total of $1,000 annually!
One-off or rare expenses are more challenging to list. But you should still do so. If you plan to spend $100 on a birthday present for a loved one, which only happens once per year. Divide the $100 by 12 to come out with an average monthly cost. And list this as an expense in your budget.
Is Your Balance Positive or Negative?
Now that you have accurate figures for income and expenditure. You can calculate if you have a positive or negative balance each month. Take your income and subtract your expenses. A negative figure means you spend more each month than you earn, while a positive figure shows you have surplus cash once you have paid all your bills.
You must make immediate changes if your balance is negative because you are heading for financial trouble. However, you can still alter your spending patterns to improve a positive balance.
Improving Your Monthly Net Figure
If you want to improve your monthly net figure, you have two options: earn more or spend less. Although most people would like to make more money, it is often out of their control because they are limited to the jobs they can perform and the number of hours a week. Therefore, it is almost always easier to spend less.
Remember who you listed all of your expenditures? You need to separate them into two distinct categories of essential and non-essentials; some budgeters call these categories needs and want.
Essential outgoings are obvious; they are bills you must pay because not doing so will have dire consequences. Think along the lines of rental and mortgage costs, power, health and life insurance, motor insurance, and groceries. Some people consider mobile phone and internet costs as essential, too.
Optimizing Expenses: Balancing Needs and Wants for Financial Well-being
Your non-essential costs, or your wants, are things you like to have. But it would not be the end of the world if you did not have them in your life. For example, a subscription to Netflix, the coffees mentioned above on your way to work, etc. We can all but guarantee that some of you will have significant non-essential outgoings that are eating into your available money each month!
Once you have your expenses in two categories, it is time to improve them. Essential items are often difficult to change because they are set in stone. That said, shopping around for a better deal from your power supplier, mortgage provider, and mobile phone and internet connections is worthwhile.
Your non-essentials are the easiest to trim the fat from. Could you make a coffee before leaving for work instead of buying one, saving you $750 annually? Yes, you probably could! You would not say no if someone walked up to you in the street once a year and offered you $750 for free, would you?
Ideally, you will spend 50% of your income on essentials, 30% on your non-essentials or wants, and save 20% to help realize future goals.
What To Do With Surplus Money?
Hopefully, you now have a positive net balance, meaning you have a surplus of money by each month’s end. Your question now is, what do you do with it? It depends, is the answer. First, You should use any surplus funds to pay off any short-term debts because this frees up more funds. Furthermore, being debt-free takes a lot of pressure off you if you or a loved one becomes ill or loses their job.
Those planning a family holiday or purchasing a new car should consider opening a savings account to keep their surplus money. Having it separate helps you see your pot growing and stops you from dipping into it.
Lastly, consider building up an emergency fund if something out of your control happens. Experts state having six months’ worth of living expenses is a great figure to aim for as an emergency fund, but having 12 months or more is ideal. Having a buffer to fall back on if something happens to you that reduces or stops your income is something everyone wishes they had.
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