Budgeting is the process of planning and controlling your money by allotting or scheduling your income and expenses based on your financial goals. Budgets play a vital role in helping individuals and organizations achieve their long-term and short-term financial objectives. When you budget, you’re committing to a plan – outlining what income and expenses are expected over a specific time frame – which you can use to monitor your progress. Therefore it is essential to understand the basics of budgeting.
CREATE A BUDGET
Creating a budget is the first step toward understanding where your money is going each month and taking control of your expenditures. To create a budget, you need to develop a list of all the money coming into the household and all the money going out. While creating the budget, it’s essential to be realistic about your income and spending habits. For many people, creating a budget will require some discipline and sacrifice. However, once you’ve made your budget, you can use it to monitor your progress toward your financial goals.
MONITOR YOUR INCOME AND EXPENSES
Once you’ve created your budget, it’s essential to carefully monitor your income and expenses. It would help if you did this monthly to ensure that you’re sticking with the plan. However, it’s also important to note that there may be times when things don’t go according to plan (e.g., an emergency pops up), and you find yourself spending more than you had initially planned. If this happens, don’t be too hard on yourself. Instead, use it as a learning experience to help you make better decisions in the future.
DIFFERENTIATE BETWEEN YOUR ‘NEEDS’ AND ‘WANTS’
It’s helpful to think of your budget in terms of the difference between your needs and wants. Your ‘needs’ are items or activities that are essential for everyday living, such as food, housing, and clothing. These expenditures often consist of fixed monthly payments (e.g., rent, utilities). On the other hand, there are ‘wants,’ which are items or activities that aren’t essential but may be enjoyable (e.g., eating out).
ALLOCATION OF MONEY
The third step to budgeting is allocating your money – dividing your income between needs and wants – to ensure that you can meet all of your payment obligations. How you allocate the money depends on how much income you have available, which expenses are fixed (i.e., must be paid regardless), and which are variable (i.e., can be paid if there is enough money left over). Once you clearly understand your income and expenses, it will be easier to determine how much money you have available.
TRACK YOUR SAVINGS
The final step to budgeting is setting and tracking a savings goal. Savings goals include things like buying a car, going on vacation, supplementing your retirement income, and paying for your children’s education. While you’re determining how much money you need to save each month for achieving these goals, it will be helpful to look at the big picture as well. The more you’re able to save, the better off you’ll be during retirement and other major purchases. So remember to set a savings goal and monitor your progress – this will help you maintain control of your finances.
Budgeting is an important tool that you can use to plan, monitor, and control your money. While it requires some discipline at first, budgeting can help you take charge of your financial situation by helping you determine how much income comes in each month vs how much goes out. As long as there are no unexpected expenses or changes to your income, it’s possible to plan for the future by allocating money toward savings goals. In the end, understanding the basics of budgeting will take you a long way financially.