Personal Finance: Budgeting

Budgeting is an important skill, but what is it?

Well, it's the process of creating a plan to spend your money. This spending plan is called a budget. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do.

Why is it important?

Since budgeting allows you to create a spending plan for your money, it ensures that you will always have enough money for the things you need and the things that are important to you. Following a budget or spending plan will also keep you out of debt or help you work your way out of debt if you are currently in debt.

What are some disadvantages?

There are some disadvantages or difficulties that present themselves while creating a budget.

• Discipline: It is extremely important to be regular and detailed in maintaining a budget as it directly impacts your income and savings. Missing out on an expense can lead to an incorrect conclusion about the spending and savings of the time period.

• Time and effort: As expected, we must carve out time every month to create a budget and update it regularly. Without dedicating a specific time period, there are strong chances for the budget to be inaccurate.

How do you make a budget?

So how do you make a budget? It's really quite simple - just follow these steps!

1. Figure out your net income

Net income is all the money you make per month, it can be from any source. Remember this should be the final value you have after taxes or any other thing that reduces the amount of money you have.

2. Track your spending

Once you know how much money you have coming in, the next step is to figure out where it’s going. Tracking your expenses can help you determine what you are spending the most money on and where it might be easiest to save. Begin by listing your fixed expenses such as rent or mortgage. Next, list variable expenses that change from month to month, such as groceries, gas and entertainment.

3. Set realistic goals

Make a list of your short-term and long-term goals. Short-term goals should take around one to three years to achieve and might include things like setting up an emergency fund. Long-term goals, such as saving for retirement may take decades to reach.

4. Make a plan

This is where everything comes together: Use the variable and fixed expenses you compiled to get a sense of what you’ll spend in the coming months. Then compare that to your net income and priorities. Consider setting specific—and realistic—spending limits for each category of expenses.

5. Adjust your spending to stay on budget

Now that you’ve documented your income and spending, you can make any necessary adjustments so that you don’t overspend and have money to put toward your goals. Remember, even small savings can add up to a lot of money. You might be surprised at how much extra money you accumulate by making one minor adjustment at a time.

6. Review your budget regularly

Once your budget is set, it’s important to review it and your spending on a regular basis to be sure you are staying on track. Elements of your budget can change - you may get a raise or you may reach a goal and want to plan for another. Whatever the reason, get into the habit of regularly checking in with your budget by following the steps above.

Format

While there is no set format for maintaining a budget, here is a simple one you can start out with. As time goes on, you can shift to a more detailed one as well or stick to this.

You can either print this out or maintain a digital budget.

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Author

Samik Heda