Budgeting is the most basic and effective way of managing money. Without a budget, your spending can spiral out of control because you are not controlling your disposable income. Your disposable income is the amount of money available for spending, saving, and investing after the deduction of taxes.
What a budget actually does is keep you on top of your finances.
1.Gives you control over your money
With a budget, you are intentional with your spending;you control your money and know where it's going.
2.Keeps you focused on your financial goals
What are your long-term financial goals? Do you want to purchase a house? A car? Start a business?
Cutting unnecessary items from the budget, saving money and sticking to the budget will move you closer to achieving your financial goals.
3.Helps you improve your habits
If you spend more than you earn, you are most likely to drain your savings, and can end up in unnecessary debt. By tracking your spending, you will know for sure if you are headed in the right direction or messing with your finances.
With that in mind, you will be able to take the proper steps to improve your habits.
4.Helps you prepare for emergencies
Life is full of surprises. And bad things happen at the worst possible times. Emergencies such as sickness, death, being laid off, divorce,etc. can cause serious financial problems.
With an emergency fund, you can avoid sinking in debt when these challenges happen.
5.Keeps you organized
A budget will keep you on top of all your income and expenses, therefore keeping you organized. Keeping your financial life organized can be a big-time and money saver.
Here’s how to create a budget in 5 steps
Step 1: Get all your financial statements
Gather all your financial statements, including:
Closely examine them to know all about your income and expenses. The more information you have, the better.
Step 2: Note your net income
The next step is to find out how much money you take home each month. If you are employed and have a regular paycheck, you automatically take home your net income since all the deductions have been made. If you have more than one job, list the net pay of each job to get your total monthly income.
If you’re self-employed, you need to deduct taxes from your income amount. If you are a freelancer and have no regular income,consider using income from the lowest-earning month.
Step 3: list your monthly income
Next, you'll have to create a list of all your monthly expenses.
Step 4: label the expenses as fixed and variable
Once you are done writing down a list of all your monthly expenses, label them as fixed or variable. Fixed expenses are those that are mandatory- you have to pay them every month. And the amount remains fixed. They include rent or mortgage payment, debt repayment, internet payment,trash payment, credit cards with a standard amount and any other expense with a fixed amount each month.
Variable expenses vary from month to months, such as groceries, dining out, entertainment, and others.
Step 5: Total all your income and expenses
Add all your income together and do the same with the expenses. If your income is higher than the expenses, then you are off to a good start. You can save the difference, put it in your retirement amount, or pay off debt.
If your expenses are greater than your income, you are overspending, and you need to make some changes to avoid that. Make some adjustments and cut some costs since some of them, such as dining out and entertainment, can be reduced.
Step 6: Stick to it
After you finish creating a budget, the next most important thing is sticking to it. Keep checking in your budgeting spreadsheet or a budgeting app and hold yourself accountable. Track your expenses in all the categories every month; make adjustments if you need to.
Checking in frequently will help you avoid overspending. Once you reach your spending limit in a category, stop the spending.
The goal is to keep your expenses lower than your income.
Don't know where to start? We created a budgeting spreadsheet for you to take your finances to the next level. With this simple template, you will be able to track your income, expenses, and monetary assets for only $2.