Budgeting is key to achieving financial success. It basically means being able to spend less than you earn to enhance both short-term and long-term planning. Some people think of budgeting as a way of depriving themselves, thus avoiding it like a plague. However, contrary to this notion, budgeting makes it easy for you to make conscious decisions with regard to allocating your funds irrespective of your total income or expenses.
Budgeting also aids people to save for emergencies, retirement or just about anything you are planning to do with your money. Therefore, having a solid budget gives you a heads up on the amount of money you have and also allows you to know exactly how to spend it to achieve your financial goals. In other words, a budget helps you to manage your finances better and improve your financial situation.
To create a budget, you need to follow three simple steps. First and foremost, determine how much money you earn on a monthly basis. In a list format, write all your income sources and the amount earned from each source. You may include your spouse’s income if you are married. If you earn a salary, be sure to note your net salary and not the gross pay.
Once you have established your total monthly income, write down all your monthly expenses and categorize them into fixed and flexible expenses. Fixed expenses are recurring expenses that do not change from month to month, such as rent or insurance premiums. Flexible expenses are those that change from month to month such as food or entertainment. If there is a significant change of a certain expense in your flexible expenses each month, take a three month average for your total.
Finally, subtract the expense total from the income total to get the difference. A positive difference savings shows that you are spending less than you earn which is commendable. However, if the difference is a negative figure, it means you are spending more than you earn, hence you need to trim your expenses to start living within your means.
Once you have created your budget, you will need to keep track of it over time to make sure you are sticking to it. If you are unable to stick to your budget, you can revise it to find a balance that works best for you.