At first, creating a monthly budget seems intimidating, and most people don’t know from where and how they should start. It is true that making a budget that helps you build wealth, while allowing you to pay off your debts and cut back on expenses is difficult, but it is certainly not impossible.
If you are thinking to start budgeting, here is an easy guide that will help you in keeping track of your cash inflows and outflows, reducing your expenses, paying off your debts, and saving a fair amount every month.
Identify your Cash Inflows and Outflows
You probably have a good idea of how much you earn, but do you exactly know where all of it goes every month? The first step of creating a budget is to know where you are spending all your money. For this, you should get a budget planner or install a budgeting app in your smartphone. Then, normally spend for a couple of weeks as you would, but this time, note down every dollar you spend. If you have studied finance, you may also consider preparing a cash flow statement.
Make a list of Wants and Needs
If you are puzzled with what is the difference between these two words, then first you need to know their exact meaning in terms of finance. Your needs are all those things that are absolutely necessary and you cannot survive with them. On the other hand, your wants are those things that can be considered as optional and you can survive without them.
With that out of the way, now you should make a list of your needs and wants. Set priorities based on this list, which will enable you to identify areas where you can cut back and save.
Lay Down your Budget
After making the list, you should sort all your expenses category wise. The number of categories you divide your expenses in completely depends on you and your shopping habits. Some of the essential ones include food, automobile, entertainment, household, housing, utilities, and several others. Now add up how much you can spend in each category.
Make sure that you are not overspending, and if your expenses are exceeding your income, you can go through the budget again and see where you can cut back. You may use software where you can maintain the budget in a proper way.
Time to Put your Budget into Action
Stick to the budget you have made in the next month, and see how it worked out for you. Evaluate whether the money you allocated was enough for covering your necessities. Also, see whether the money you put aside for savings, debt payments, unexpected expenses, and entertainment was enough. Make adjustments to your budget for the next month based on your experience. Stick to the new budget and see whether you achieved your financial goal for the month this time around.
Don’t Let Failure Come in the Way
Since it will be your first time, there are chances that things may not go exactly as you planned. However, you shouldn’t let failure bring you down. Learn from the mistakes you have made, and make improvements wherever necessary. In this way, you will be able to make a budget which you can easily stick to, and it meets all your needs.