The importance of Budgeting should be emphasized, and that is why you are at the right place.
Well, this article will discuss extensively Budgeting and how to do a simple personal budget.
Budgeting: What is it?
There is a reason why we stated in the introduction that Budgeting is the sole responsibility of every adult. This is because Budgeting is basically planning and managing your finances.
But there are a lot of things involved. Budgeting is way deeper than just tracking your expenses; it considers things like your savings, paying down debt, investments, and much more.
In other words, it entails having a plan that helps you to have the right balance between your expenses and net income so you do not run into bankruptcy or debt.
Budgeting is a tool that helps people make better financial decisions and adjust their lifestyles accordingly to suit their current situation.
Budgeting gives you a clear description of what you are spending your money on, how much balance you have left at the end of the month, and what you need to cut your expenses on to have better savings.
Budgeting gives you a realistic plan to clear your debt without starving if you're already in debt.
Another word for Budgeting is discipline. Without discipline, it would be very difficult to stick to a budget. This now ushers us into the next subtopic.
How to do Simple Personal Budget
It is easy to write down a personal budget, but the main work lies in following it, which is why we have drafted a practical guide to creating one for you.
Here are steps to do a simple personal budget:
Categorize your expenditures into discretionary and fixed expenses.
It is vital to group your expenditures into discretionary and fixed categories.
Discretionary expenses are unforeseeable and are expenses you never see coming. You have no control over them because they appear and need immediate attention.
If you are not prepared for discretionary expenses, they can hurt your finances. This includes health challenges. Fixed expenses are the expenses you expect to make, and you know you need them. This includes rent or utility bills. When you categorize these groups, you know what your monthly expenditure is
Know your net income.
Calculating your current net income is the second step to creating a personal budget. This eye-opener lets you understand your real finances based on facts. Knowing your net income means knowing the money you have after subtracting your total expenses from your total income. You should understand that your expenses include your investments as well. If your net income is negative, it indicates that you are living above your income and need to adjust your lifestyle.
To do this, you can use an Excel spreadsheet that gives you the calculation automatically, and all that is required is putting the values. You could also use a budgeting app on Android or iOS phones, and it effectively calculates how much money you have at the end of the month.
Adjust your Expenditure.
You need to look deeper into your expenses and filter what is necessary and what is not. This might feel foreign to people who live paycheck to paycheck or have never lived under a budget.
For some of the necessary things, it is also important to look at the cost and see how you can cut them down. It might look insignificant, but when you accumulate all the items, it becomes a significant cut-down.
Make an Achievable Plan
You now know your expenses, income, and net income. Possibly adjusted to a few things, the next step is to process if you can practically live by what is on your budget.
A realistic budget is within the money available at the moment, while an achievable budget can practically be attained within a period.
What's the point of a budget if you can't stick to it? Nothing.
As much as you need to make a budget, it should be achievable so you do not set yourself up for frustration. There is a proven method that can help you: The 50/30/20 rule. The 50/30/20 rule is an effective way of creating a budget. This rule entails that you spend 50% of your income on your needs, 30% on wants, and 20% on savings and debt repayment.
Review your budget
To stick to your budget in the long term, you need to review your budget regularly. This is because the economy of a geographical location is always bound to change.
It changes unexpectedly and can have either a positive or negative effect on your budget. A better economy swings your budget in your favor, leading to better savings. Your income might get better, cost of living might as well reduce.
A recession swings your budget against you, leading to a tighter budget. Your income could reduce while things get more expensive. This could be a time to cut down on the extra loan or cut your expenses on things like rent or car bills. Irrespective of the situation, you need to adjust accordingly. As they say, drastic situations call for drastic measures. It is recommended to review your budget every month.
Why do a simple personal budget?
Most times in life, things do not always go as planned. The emphasis is on 'planned.' Now just imagine if you do not plan. Life could be brutal. A personal budget puts you in control of your finances, thereby directly preventing you from being a slave to your desires.
When you have a budget, you know what you spend and should spend your money on. It helps you identify your priorities so there is little to no opportunity to spend your money on an investment.
Additionally, having a personal budget helps you identify the suitable lifestyle for you, putting you in a better position for long-term success.
For those who are struggling, Budgeting makes you focus on your goals. You are not very comfortable, so this forces you to put in extra work to be comfortable. You will know the money you need to comfortably take care of your expenses and have good savings at the end of the day.
In summary, having a simple personal budget is an effective way to control your finances and life.
We hope this article gives you a practical guide on your budget and why you should follow it.
Good luck.
