A mere 6-letter word that holds hefty weight. A lot of people flee at the sight of this word but before you get intimidated by it, you might want to be enlightened on the positive outcomes of having a concrete budget. Have you been one to go off the rails in spending a ton at the grocery, only to find yourself a little short on cash due for the next bill? Take the example of a non-believer of budgets.
One non-budget Indianapolis resident has scheduled apartment maintenance with an electrician. However, in a sudden turn of events, she decided to go to the grocery for a food run to fulfill her cravings. Since she did not set a budget for her food, she found herself unable to pay her Indianapolis Electrician.
Budgeting is not simply restricting yourself not to spend too much money, but it also helps you organize your expenses preventing you from going overboard on certain aspects. Electricity is just as important as food and one cannot be sacrificed for the other. Knowing your priorities and allotting specific amounts to spend for these will not in any way restrict you, but will, in fact, liberate you.
Here’s the nitty gritty of the often neglected, underestimated but totally necessary act of – Budgeting.
What is a Personal Budget?
A personal budget is a specific plan of expenditure. It is a detailed, pre-set arrangement of where your money will be spent on. Re-evaluating revenue and allocating specific amounts for your needs and wants is called budgeting. These are activities a lot have already put into their daily routine yet a lot still put off this task as grueling and daunting.
A lot of people are intimidated with setting a personal budget. Planning – and sticking to the plan can get quite overwhelming when you are doing it for the first time. It will help you keep track of where your money goes and which aspect eats up a big chunk of it.
Why is Personal Budgeting Important?
As much as it gets so much bad reputation, budgeting reaps such positive results once you get the hang of it. Both in short-term and long-term timelines. Personal budgets will help you reach a lot of your financial goals.
1. You keep track of where your money goes – It provides an overview if you are earning more than you are spending. It will help you gain control over your money instead of the other way around. Also, knowing what you are earning money for will help set your financial compass and it may serve as a motivation to work.
2. You will be able to balance wants and needs – You will be able to prioritize the needs before you go crazy with your wants. You will be able to silence that inner debate if you are going to get your want before you pay for your need. E.g. That luxury bag will lose its appeal when you know you have to cut off on rent and electricity.
3. It will prevent you from overspending – In the short time you set a personal budget, you already avoid the horrendous feeling of falling short of money. Ideally, you have to earn more than you spend. When you have a firm budget, you avoid whipping out your credit card even if you have negative revenue.
4. You become more financially responsible – When you practice budgeting in the long run, you will become more comfortable and stable with your finances. You will no longer be on the edge of your seat waiting for the next payday which is not healthy. Therefore budgeting also reduces stress because you are exactly living within your means.
5. You will be able to save – Whether you are saving for a rainy day or an investment, budgeting will be able to include setting aside an amount which is not intended for spending. It feels great being able to say that a part of your money actually goes into your future.
These are only a fraction of the short-term and long-term benefits you will gain from setting a personal budget. You have to dive into the first-hand experience to get the full package of every single advantage of budgeting,
When Should You Start a Budget?
You should start budgeting now. If you just cashed out your paycheck, you can start getting a pen and paper and view your overall revenue from a bird’s eye view. For people on the go, you can also opt for a mobile application that you can modify and view wherever you are.
How to Make a Personal Budget
Allot a bit of time t sit down and plan your finances. A few minutes of your time will be worth the zero worries you will have for the rest of the month.
To start off on a clean slate, your next paycheck can be your kick start. Follow these steps to getting that budget in high gear.
1. Assess your current monetary situation – This includes your income and the money you have set aside. If you have businesses, side hustles and the like, jot it all down too. All sources of income matters so make sure to list those down too. If your monthly income fluctuates, estimate an average amount. List down or type in the numbers to get a good view on your current status financially.
2. Evaluate your expenditures – Based on your last month’s spending spree. If you can’t fully remember every single spend, you can go back to receipts, bank statements, bills and the like. Know how much your monthly total is and view it parallel to your income.
3. Separate Wants and Needs – Determine expenses where it is fixed for every month such as rent, electricity, groceries and add everything up under your ‘needs’ list. For the fluctuating expenditures like entertainment and clothing,
4. Set a fixed amount for all expenses – When you have your wants and needs list down, lay down your full income in order to come up with reasonable amounts to stick with. Here are some techniques you can follow to ensure that your finances are in good hands.
• 50/20/30 rule: This is an effective method that is simple yet it could be powerful if strictly followed. Reserve the amounts from portions of your income based on this order. 50 percent will go to your needs which can include your food, rent, maintenance and everything you cannot neglect. Then put aside 20 percent of your income for your savings. Whether or not you are saving up for something, in particular, this part should always come after the needs. 30 percent will go to your wants. This should be the last order of business and should always be a matter of least priority. This includes your artisan coffee run, your dinner take out, or random clothes purchase.
This formula can vary every month. When unexpected circumstances emerge, you can use a portion of ‘wants’ for medical expenses when your ‘needs’ budget is not enough. If you haven’t used up your allocation for wants, you can definitely merge it with your savings or your needs.
• Envelope method – If you are the type to overspend, this method may be for you. The envelope method consists of a budget broken down in categories. Each category is then filled with the amount allotted for the specific category. Everything in this method is based on cash so you have to withdraw your full income and stuff them into these envelopes. When the envelope becomes empty, this means you cannot spend any more on that category. You are not allowed to get from other envelopes in case it becomes empty.
This method will make paying your bills a breeze. You won’t be tempted to use credit cards, you will be able to control your spending, and it will help hone your financial discipline. Of course, envelopes may be entirely hypothetical. You can make use of mason jars, acrylic organizers, or simply anything with compartments.
5. Determine your goals – Be specific in how much you want to save for the month. It is essential that you get this out of the way before you dig deep in other aspects. Make sure to set realistic financial short term and long term goals. Examples of this are paying your credit card bills, fully paying your car loan, or simply setting an amount you want to save for the month or for the year. Setting your goals does not stop with thinking about it. Again, put everything on paper so that you will be reminded why you are hustling in the first place.
6. Keep Track of your Budget – Last but not least, you have to monitor the progress of your budgeting. No matter what method you use, you have to properly record your expenditures. It is okay if you weren’t able to firmly stick to the budget that month but knowing your points of improvement will help you avoid the same mistakes. More so, it will keep you updated when you have reached your financial goals.
“A budget is telling where your money goes instead of wondering where it went.”
We can only provide a handful of the ins and outs of budgeting. You can delve into the deep abyss of finance and budgets by looking for a personal financial advisor, or downloading financial apps or buying books to help you expand your knowledge. Bottom line is: let go of your preconceived notions about this seemingly intimidating act and start making use of your money wisely. It is not restricting your money, it is actually paving your way to financial freedom.