It is no exaggeration when people say “every penny counts”. If you are not tracking your monthly or annual expenditures, then you are missing valuable opportunities for cutting costs and putting money where it would have the biggest impact. Creating a detailed and accurate monthly budget is a must if you want to control and save your money.
What is budgeting? Budgeting is the process of creating a spending plan for your money. Creating a spending plan allows you to determine in advance whether you will have enough money to do the things you need to do.
Why is budgeting important?
Budgeting is a very important financial management skill that is essential to older teenagers and adults. Learning how to budget comes with the following benefits;
- You can set realistic goals and objectives
When you create a budget, it allows you to list both short-term and long–term goals. Once you have them set, budgeting will help you prioritize goals according to their importance and allocate adequate money to achieve them on time.
- It helps to you live within your means
If you are an impulse buyer, I’m sure there are many times you end up spending money buying items that you had not budgeted for. This mostly happens to people with credit cards. To avoid falling into this common trap, budget all your income and avoid using credit cards to purchase items if you have difficulty paying your credit card balance off each month. Budgeting your money helps to tame bad spending habits. It also helps you in differentiating between needs and wants.
- It prepares you for a financially stable retirement
When you start budgeting your money earlier, one of the areas that you will redirect your money is in investments. Setting aside a portion of your income for investments will grow your nest egg and will guarantee you a happier lifestyle in the future when you will retire.
- It helps you to get prepared for any emergencies
The unexpected happens in life which is usually beyond our control. That is why it’s very critical to have an emergency fund in place to cater for any unexpected emergencies that arise. The recommended emergency fund is 3-6 months of living expenses.
Steps to create a budget
If you are wondering how you can start budgeting your money, here are the basics of budgeting for beginners:
Step 1: List your monthly income
Do you have one or multiple sources of income? If you only have one job, it makes it easy to determine your monthly after-tax income. If you have more than one job or receive irregular income, add them all together to get to total monthly income.
Step 2: List all your fixed expenses
Fixed expenses are the ones that are predictable and don’t change over a short period. They include; house rent, personal or student loans, mortgage payments, and automobile loan payments. Having a list of all your fixed expenses will help you to predict the expected minimum expenses that you can incur in a month.
Step 3: List all your variable expenses
Variable expenses are the ones that fluctuate. They include; utility bills, transport, food items, and clothing.
Step 4: Set short-term and long-term goals
Are you planning to buy your first car or home? Are you planning to go on a vacation? Asking yourself such questions can help you to come up with goals that you can plan to achieve at both short–term and long-term intervals.
Step 5: Create a working budget
Now that you have clearly understood your monthly income and the projected expenses, it’s time to create a monthly budget spreadsheet. Start by allocating urgent and important needs and if you have remaining funds add in less important wants.
For more help with budgeting, check out the website Budgets are Sexy