Budgeting is the process of creating a plan on how to spend your money in which the spending plan will be known as the budget. Is definitely a perfect way to save for those things you want to achieve, like a buying your own house or going on your dream trip for your next vacations. It’s also an easy way to prioritize your spending and focus your money on the things that are most important to you. Budgeting really helps you out with balancing the way you spend with how much you make, avoiding debts that will not only cost you more money but will affect your mental health since you will be stressed out of how much you have to work to pay those.
Creating a budget also helps you in case you have an emergency since you have a saving backup plan, for example you had a major illness and had to spend on an special treatment to cure it which wasn’t part of your monthly budget, but since you had some savings you could afford it. To create a budget you should start by following a simple guide that will help you to the process, you can even download budget spreadsheets from across the internet that will adapt to what you need or serve you as an example of what you want to create. Budgets should be updated every time you need it so don’t be afraid of changing the way you do things as long as you see results!
1. Calculate Your Monthly Income
This first step is crucial, since you need to know how much you usually make to know how much you can spend. If you make your living as a freelancer make an approximate of how much you usually earn a month or place a target you need to achieve each week or month. If you have a regular job that pays you every fifteen days or every month it will be a bit easier to calculate your income.
Some people tend to have an additional income besides their regular job, if this is your case, then you should add it to your income budget. Also, a good thing to know is that maybe on a month you had an extra income you don’t usually have, so on that month at it to the income budget because it’s part of it.
2. Track Your Monthly Expenses
Every month there are things we regularly spend on, for example grocery shopping, paying our cable bill, gas, water bill or rent/mortgage if you have one, these types of expenses are known as non-discretionary expenses. If you are not really sure how much these expenses might be you could go and check your payment records from the last month to three months before to know an approximate of it. Don’t use random numbers of how much you think you spend monthly on things, since this fact won’t really serve you. To make a budget you need expenses that can be listed line by line and as much accurate as possible.
There are other type of expenses called discretionary expenses which means these are expenses you currently pay but they are no essential. For example, going to get you hair done is not something you have to do every month. Sometimes you will have to back off from some of your discretionary expenses to adjust to your final goals.
3. Set Your Financial Goal
It’s pretty important when creating a budget that you make your financial goals a priority. It could either be saving for an emergency found, saving to get a new car, paying all your debts or saving enough to go on a trip you have always wanted to. Think deeply about how you want your financial life to be from now on, making goals that are realistic enough you can achieve them and not become disappointed by the end result.
Once you have your financial goals set for a short term that could go from six months through a year, include them as part of your monthly budget as expenses. Since you will have your financial goals written as expenses you will be paying them monthly by acquiring the habit of saving for those goals you have set.
4. Subtract Your Income From Your Expenses
Once you have all of the above steps done and written down continue by subtracting what you have in your incomes from your expenses and you could get three different results. The first one might be an even number which means you have the exact amount of money but no margin. If you get this try to adjust your budget to have some margin in case of an emergency. The second result could be a positive number, which is probably the best one from all the results you could get. This means you are spending less than you what you make, and you could turn those extra numbers into more savings or use them to pay a debt you have faster.
The last result is a negative number which is a big no we want to avoid when budgeting because it means you are spending more than what you really make. But if this happens to you, there is no need to panic, since it can be fixable. Adjust your budget by decreasing some of your discretionary expenses until you get the result you need to move a bit forward your financial stability.
5. Keep Monitoring And Adjusting
From steps 1 through 4 you will have your budget ready, now you need to keep on the look out of it. This means you should review your budget at least once a month and see if you are meeting your goals or if something is failing and how to fix it. But be sure to check it regularly and not just make it as something to get it out of the way and forget it the next day.
Keep on tracking your budget and remaking financial goals once you meet the ones you had established before because by doing this you will be more than motivated to keep on with the good work on saving and maybe even encourage others to do so.
Do you have a life budget already? Let us know about the experience of having one!
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Hi! I'm a fashion designer based on San José, Costa Rica who breaths art in all its ways; writing, reading, painting, dancing, music... and its super passionate about them all! I also adore learning something new everyday and getting to know new people. If you have any doubt, don't be shy and ask me!