How to Budget Money?
From the moment we start working, many of us cherish payday. Having that lump sum fall into your lap is always an enjoyable feeling but, sadly, it has its own dark side – it never seems to last! The first two weeks or so are easy enough to get through and we always find the cash we need. But by the end of the month, money always seems to be getting tight and that last week feels like the final stretch of some horrible marathon. Of course, some people aren’t even that lucky and they can start to feel the strain just a few short days into the new month. Maybe you’re constantly finding yourself in a similar situation or perhaps you’re financially stable but you just want to save a bit more. Either way, the answer lies in effective budgeting. But what does this entail? How do you budget money and where’s a good place to start?
Budgeting is simply the practice of creating a financial plan to manage and spend your income, usually over a certain period. Whether it’s for the next few weeks or even the next few days, it’s always a good idea to know how much money you have available and what you can afford to spend it on.
Before we go into any detail, it should be noted that there are many different types of budgeting and just as many advocates swear that their methods are the best. In actuality, due to the highly specific nature of each person’s finances, the best budget plan for you will probably be the one that’s tailored to your types of income, your expenses, your lifestyle, etc.
That said, there are some universal basics that apply to almost any kind of feasible budget. By considering these, we can at least form a rough framework for our future financial plans.
How should a Beginner Budget?
Many newcomers to the world of budgeting worry that they don’t have the requisite mathematical or financial skills to make it work. In truth, basic budgeting is a lot simpler than you’d think and you’ll do well to simply follow a rudimentary checklist –
- Work out your Actual Income – A lot of people look at their total income before tax and begin budgeting from there (rookie mistake!). You first need to work out precisely how much money you actually have, ready to spend at the start of each month, before you can begin divvying it up.
- Work out How Much you Spend in Between Paychecks – Add up all the costs that you incur from the moment you get paid to the arrival of your next paycheck. The most important thing is to ensure that you aren’t losing money here. If your expenses are outpacing your income, you’ll need to either make more money (let me know if you figure out how to do this one) or spend less.
- Figure out what you can Save On – There are going to be certain things that you simply can’t live without such as food, electricity, water, etc. Pay for these expenses and don’t look back. But if you’re really struggling, it may be time to ask yourself whether or not you really need to go out clubbing with your friends this week, or perhaps the holiday this festive season can wait. Regardless of what it is, it’s always helpful to cut out superfluous spending during hard times.
- Start Saving Money – The key is to get to your next paycheck with some money still in your pocket. Obviously, some people find themselves in dire straits and can’t seem to save anything, but this doesn’t change the fundamentals – Living paycheck to paycheck is a problem, and going into debt is a tragedy.
- Don’t relapse – So let’s assume this all goes according to plan and you start making money hand over fist. Time to relax and go back to partying, right? Well, while it might be tempting to burn through your excess cash, people who keep living frugally usually find their savings increasing at a faster rate and are less likely to end up running a deficit again.
How do I create a Monthly Budget?
As noted, the fundamentals of budgeting don’t really change that much regardless of when you get paid, however, monthly budgeting can be a bit more tricky as there’s more time for things to go wrong and for your money to run out.
For the most part, you can stick to the guidelines we’ve been through already, but consider using them in tandem with the following points if you really want to start saving –
- Don’t Treat Every Month Identically – As painstaking as it is to draw up a new budget every month, it’s a vital process when you consider that the expenses (and sometimes the wages) present in each month tend to differ and a plan which worked in February may not work in March. For example, maybe you just barely made it over the line last month and you plan to do the same thing this time around, but what if it’s your mom’s birthday next week? You might have to buy her a present or take her out for lunch which could push you over the limit if the extra expenditure hasn’t been factored into your new budget.
- Emergencies Do Happen – An important reason why you shouldn’t be at net zero when your new paycheck comes in is that unforeseen issues may arise which require a Rainy Day Fund. Spending the little bit of cash left over at the end of the month may seem enticing, but what happens if your car breaks down the next day? It’s always good to have a financial parachute when things go wrong, even if it’s a small one.
- Don’t Put Off Paying Your Debts/Bills – Oftentimes, people are given some leeway when it comes to paying their debts/bills. If you haven’t got enough money for any relaxing activities in your budget, it can be tempting to leave these hassles for next month and treat yourself to something nice in the immediate future. The biggest issue with this mindset is that many debts tend to increase in cost with each passing month and you’ll end up paying more in the long run. Even if this isn’t the case, it’s likely that the next month will have its own debts/bills to pay which will result in even more severe cost cutting on your part.
What is the 50, 30, 20 Budget Rule?
The 50, 30, 20 budget method is a simple system whereby your after-tax income is split 3-ways to cover 3 different financial areas. In short, it goes like this –
- 50% goes into Needs – This percentage covers your must-haves and includes everything from your rent to your food and water.
- 30% goes into Wants – This portion is set aside for the less vital parts of your spending such as luxury items and recreation.
- 20% goes into Savings/Debt Payment – The remaining part of your income should be put to use paying off any outstanding debts. If you’re lucky enough to not have any debts, it would be wise to put your leftovers towards your savings.
Much like other budget plans, the 50, 30, 20 rule is most effectively used as a flexible guideline rather than a strict regulation. Don’t forget to tailor your budget method for your personal situation.
In Conclusion – How do I Budget my Money?
Although methods for budgeting differ slightly depending on who you ask, certain fundamentals remain the same and tend to provide a great baseline for newcomers with little experience in the matter. The most universal principle involves calculating your actual income (the amount you make after-tax) and subtracting your expenses from this amount. If you end up with a negative figure, you’ll need to either earn more money or cut down on your expenses. That said, even if you’re not running at a loss, it’s always a good idea to have some money left over when your next payslip arrives as you never know when disaster may strike.
Another key tenet of budgeting involves searching through your expenses and working out where you can save money. Obviously, things like food, water and shelter are must-haves and can’t be avoided but many individuals are able to identify areas of superfluous spending (especially amongst their luxury purchases) that they can do without. Cutting down on these kinds of expenditures can often result in a surprising amount of savings flowing into your bank account each month.
Once you begin saving money from paycheck to paycheck, it’s also a good idea to begin paying off debts and investing the extra money rather than rewarding yourself with frivolous purchases. Instead of just avoiding debt, the main goal of budgeting should be the creation of future savings and a financial safety net that can be used in an unforeseen crisis.
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