Budgeting Basics To Help You Create a Budget: Part-1
Whether you realize it or not, knowing the budgeting basics is necessary to manage your money effectively. The very basic concept of personal finance is you earn money, and then you spend that money. It involves budgeting on a regular basis.
When you get to spend your income on something, you already know that you can’t spend that same money on something else – which may be more important. But by creating a budget, you get to know how much money you have, how much to save and what your monthly expenses are.
What Is A Budget, Anyway?
A budget is the backbone of your personal finance, irrespective of your situation. You simply have to break down and plan how much money is flowing in and where it goes. Have you ever seen a successful business that doesn’t track its income and expenses? Well, the same rule applies to your personal finances.
Most folks have a misconception that if they create a budget, they instantly need to cut back on fun spending. Maybe that’s true, but you can’t figure out what expenses are to be eliminated until you create a budget plan.
A professional financial planner, James Mannion, says that most of us get a limited amount of money every month. And there is an ever-growing list of creditors and bills that cannot wait. Therefore, it becomes necessary to create a budget and stick to it.
Remember, you are not creating a budget to live a miserable life; you are creating it to effectively manage your money. Without proper allocation, funds may fall short.
By creating a budget, you take control of your money; otherwise it may control you. Don’t fill your mind with negative thoughts that a budget will make your life miserable. Of course, you can still enjoy life and include “fun activities” in your budget.
Track Your Monthly Income
The first thing in creating a budget is to calculate your monthly income from all sources. It’s very easy, you just have to look at your salary or profits if you are a business person. Married people can add their spouse’s income as well. It’s always better to include income from other sources as well, like income from interest, dividends, a website or a side business, etc.
Track Your Expenses
Once you have penned down your exact sources of income, you need to take a look at your monthly expenses. Include all the fixed monthly payments such as mortgages or rent, insurance, car payments, taxes, debts, etc. Usually, these are the fixed expenses, meaning the amount doesn’t change every month.
Now you have to work up a little to find out where the remaining money goes every month. Take out your latest bank statement or checkbook for help. This way you can figure out how much you spend on entertainment, groceries, magazine and TV subscriptions, utilities and so on.
Finding The Balance in Your Budget Plan
By now you have all the information you need to create your budget. Add up all your income, and then total up your monthly expenses. Now subtract total expenses from your monthly income. If this figure is positive, you spend less money than you make. Great! In case the final figure is negative, you need to better control your expenses.
Don’t panic. Now that you have seen how much you fall short, all you need to do is adjust spending in certain areas to improve your budget. Sometimes making just small adjustments in spending habits is enough. You can cut corners by cancelling your magazine subscriptions, going for matinee instead of the prime time show, or by reducing the number of times you eat out.
To make budget planning more practical and easy for you, I will show you how to prepare your budget, step by step next week.
Do you create a budget to manage your finances? What challenges you face along the way?
Read next article in series: Step by Step Guide To Create A Realistic Budget: Part-2