Why Create a Budget?
If you have not created a budget yet or are looking to improve your strategy, then check out the reasons why you should make a plan.
1. It Helps You Keep Track of Expenses
Perhaps the most basic reasons why you should create a budget plan is that it helps you keep an eye on your expenses. While working individuals are likely to have a stable income, they are always caught in a flurry of bills and payments. This leads them to miss payments for some of their expenses including utility bills, credit card repayments and other similar repayable items.
Budgeting can help you avoid such problems. By creating a well-thought-out plan, you can have a look at your income and outflow on a holistic level, especially as this activity requires listing down your expenses and allocating money to pay them off. This list can serve as your guide with regards to paying bills and setting aside funds for other dues.
2. It Allows You to Save Money
Because you will be outlining your payables within a given period, you will be seeing where your money goes and how much you are disbursing. As a result, you will have an idea of how much money is not spent on regular expenditures or necessities. You can use this knowledge to allocate how much you are willing to spend on non-necessities. In turn, this will give you an amount that you can set aside as savings.
3. It Gives You Peace of Mind
During the process of budgeting, you are likely to feel overwhelmed when you see how much you are spending on a monthly basis and how much you can save. However, you are likely to feel relieved after formulating your plan, especially when you strictly adhere to your budget.
Sticking to your budget means that you are closer to achieving your goals with regards to minimizing overspending and maximizing your savings. In turn, you can rest assured that you will not be caught off-guard when the bill comes. You might even have the dough to spare for emergencies and the occasional treats for yourself.
4. You are in Control
For most people, overspending and lack of funds are two highly familiar experiences. When you overspend, the most obvious result is that you will lack funds, so you decide to make up for the lost cash in the next payday. This then results in another round of insufficient budget for the month
If this cycle continues, you are likely to spin out of control. When you create a reasonable and realistic budget plan, you can minimize the possibility of spending more than you can and should, breaking the cycle of overspending and lacking.
Different Methods of Budgeting
Now that you know why budgeting is crucial, you may be wondering how to effectively do it. Worry not because here are 3 different ways of creating a budget plan.
1. The Old School Way
Traditionally, making a plan includes listing down your expenses and allocating your income to cover these outflows. So, you will need to have an exact record of what you pay for on a monthly basis.
This likely includes utilities (water, electricity, internet and phone), groceries, laundry, rent and other similar expenses. You will also need to include dining out, entertainment and transportation costs, as well as emergency funds, short- and long-term savings.
Once you have a comprehensive list, you will assign amounts that you want to spend on each item. As you can see, this is quite taxing in terms of time and energy, making this method perfect for people with more time to spare.
For people who live a fast-paced life, this method may be suitable for your lifestyle. The main goal of this budgeting plan is to divide your income among your needs, wants and savings. Basically, half of your pay will be funnelled towards your needs, while 30% will be allotted to your wants, and 20% will be placed in your savings account.
The primary difference between the 50/30/20 and the traditional plans is the differentiation between needs and wants. In a conventional way, you lump all of your grocery items under one category. However, not every item can be considered a need or a want. With the 50/30/20 method, you can minimize your spending on wants as compared to needs.
3. 80/20 or the Pay Yourself First Method
With this strategy, you will only be setting aside money from your income. Out of your whole budget, you will take your savings and keep it stashed right away. The remaining 80% is for you to spend as you wish. As simple as that.
However, the best thing about this method is that it is flexible. This means that you can modify the distribution into 70/30 and even as uncompromising as 50/50. Your division will depend on how much you are determined to save.
Essential Budgeting Tips
So, you know the importance of budgeting and how to do it. If you are still unsure of how to begin, take a look at these great tips.
Set Your Goals
Perhaps the very first step you should take when deciding which method to take is to set your goal. Do you want to save a huge chunk of your pay or do you prioritize your needs? Maybe you are more pressured to spend based on your fixed monthly bills. By having a clear idea of what your goals are, you are likely to find the method that works best for you.
Use Budgeting Tools
While you may have the time to manually write down and compute your budget, it always helps to have the right tools that can make everything easier. If you have a smartphone (and I know you do), you can make this process go a lot smoother. You can simply download budgeting apps such as Mint, PocketGuard and You Need a Budget (YNAB).
Most Importantly: Stick to Your Budget
Lastly, your plan will not work if you fail to strictly adhere to your budget. So, make sure that you constantly check your plan to see whether you are spending according to your allocations. Better yet, subtract your short- and long-term savings and lock it away in an account that you rarely use. As for your remaining funds, make it a point to separate the amount you should spend per category.
The thing about budgeting is that it is not a one-size-fits-all solution to everyone’s financial woes. There are many ways that your plan could go wrong (or right), depending on your circumstances. The key to making your budget successful is to be reasonable and realistic and make sure to be disciplined when it comes to spending your hard-earned money.