The word “budget” gets tossed around a lot, from the mom who tells her teen that a new gaming system is not “in the budget,” to the school officials who moan that “the annual budget was cut”.
How to budget effectively, however, remains a mystery to many people. Their financial records are a bewildering jumble of wadded up gas station receipts, old credit card statements, and random check stubs. They have about as much idea of how to budget effectively as they do how to teach their cat to sing.
The number one rule for effective financial management is to spend less than the monthly earnings. This is easier said than done. Many people have found themselves in situations where they spend more than they get per month. This is mainly due to poor spending habits and the inability to budget properly. This post will look into some of the techniques one can apply to ensure he or she spends within their financial limits.
Learning how to budget effectively is not terribly hard, but it does take a little time to sift through all your spending records and track where your money goes each and every month. Below are a few helpful tips and some advice to make things a little easier for you.
Calculating Monthly Income –
The first step to budgeting is to know the monthly income after taxes. This is the amount that reflects on the paycheck every month, otherwise known as your take-home pay. It usually reduces if there are deductions such as 401(k), life insurance, homeowners insurance, savings and health insurance. This deduction must be subtracted from the amount reflected on the paycheck to get the net income. Budgeting usually starts with knowing how much is available every month for spending.
Identifying Monthly And Daily Spending –
After knowing how much is available every month, the next step should be to identify the expenses. Knowing them will make it much easier to allocate money when budgeting. Monthly spending may include TV cable fees, water and electricity bills, internet connection fees, debt payments, rent, gym membership, subscriptions, and anything else that requires monthly payments. In addition to monthly spending, there should be a list of those items that are bought on a daily basis. These may include food, groceries, fuel, and shopping. There are also miscellaneous items, such as house maintenance, car repair, clothing, and entertainment which must be included in the list as well.
Creating A Budgeting Plan –
The list of monthly and daily spending will play a key role in this step, so it is important to come up with a comprehensive list that covers everything. The next step to take when planning a budget is to indicate the amount of money spent on each item in the list. This should be written next to the expense listed. This way, it will be easier to add them up and compare them to the amount available as disposable income. A good budget plan should first consider items that one cannot go without or those that are very essential, such as food, transportation, clothing, electricity, utilities, and mortgage or rent. It should also allow some room for saving by getting rid of those items that result from poor spending habits. If saving is the goal, then it makes sense to get rid of unnecessary items to create some room for saving.
Seeking Advice –
Budgeting can be very challenging for a lot of people. In such cases, it is wise to seek help from someone who is an expert in budgeting. There are so many financial experts out there who can help for free or charge a very small fee. Alternatively, there are plenty of free budgeting tools that can help track monthly and daily expenses. Tools such as Online Budget Advisor or secured bank connected tools such as Mint and Personal Capital that monitor credit card and bank account statements to provide information and advice on spending and budgets can really help. They are quick to set up and very easy to use.
The 50/20/30 Rule –
Financial freedom and prosperity begin with observing the 50/30/20 rule. The rule typically limits spending on needs to 50 percent, wants to 30 percent, and debt repayment and savings to 20 percent. A good budgeting plan should feature this rule. It is the gateway to responsible spending, financial freedom, wealth creation, and a stress-free financial life.
Get Back To The Basics –
If you do not know how to budget, the first thing you need to do is to gather up all of your receipts, credit card statements, loan records, utility bills, and cashed/canceled checks—anything that will show what you have spent money on in the past few months. It is a good idea to go back at least six months in order to get accurate figures.
As you begin to see categories where your money goes regularly–eating out, transportation, housing, entertainment, and medical expenses–you can create a chart of columns. You will probably come up with many different categories.
Add up all the expenses, category by category, over the months in question. For instance, take all the gasoline figures for the past six months, tally them, and then divide by six. This number should be a pretty good average to budget for gasoline expenses each month. That is how to budget effectively the amount for each category.
When you have an average for every category, get a total of all the averages and compare it to your monthly income. Hopefully, the total will not exceed your take-home pay each month. If the total does add up to more than you bring in, you will need to make some adjustments or cutbacks to your spending. Sadly, that is part of learning how to budget. You need to be able to look at your spending habits honestly and locate unnecessary items that could be cut out or at least limited.
Now that you have a basic understanding of how to make a budget, you have no excuse to put it off any longer. A good, working budget is something to be proud of. Take control of your spending today!
If you need help creating a budget or understanding your budget, give us a call at 1-866-699-2227 and speak with a certified credit counselor for free. They can answer any questions you may have. You can also visit us online at www.advantageccs.org and find your answers on our website. We’ve been helping people build better budgets since 1968 and we can help you too!