Personal finance is a unique journey for everyone, with different methods suitable for different individuals. Creating a budget is your first critical step before seeking financial advice. It requires a clear understanding of your income and expenditures. Many people are unaware they’re spending more than they earn until they map it all out. So, it is crucial to create a budget, trim unnecessary expenses and align to it. Several fundamental habits can pave the path to financial success, and budgeting forms a significant part of these.
The perfect time to draw a budget is now. There’s a plethora of methods and resources available to help you in your financial progression.
BUDGETING FUNDAMENTALS
Once you’ve decided to commence budgeting, the first important step is to sort your finances. Regardless of the method you choose, it’s critical to ascertain your current financial status to plan your financial future. Gather all your financial statements such as credit card statements, loans, and your latest bank account details. This is crucial for success.
If you’re inclined towards visual information, then use a pencil and paper approach to draw a picture of your expenses against your income. Alternatively, if digital tools or spreadsheets are more your style, feel free to use those.
Once you have gathered all the information, it’s time to track your income and expenses. Depending on the nature of your job (full-time, part-time, contract), you should calculate your weekly or monthly income. For those employed hourly, use past data to forecast hours. For salaried individuals, existing pay stubs can help figure out the monthly income.
Next, establish your expenditures. For monthly bills, classify them into categories like utilities, rent or mortgage, gas, food, etc., and the monthly amount payable towards credit cards and loans. You could start with the minimum repayment for an initial budget and then later reassess if you can allocate more money towards repaying the debt.
It’s equally crucial to track your spending and debts and monitor your progress.
It’s now time to select a budgeting method best suited for you, keeping in mind you can always change or modify your approach.
ENVELOPE SYSTEM FOR BUDGETING
One common method is the Envelope system. This involves dividing your expenditures into categories and assigning funds to separate envelopes for each category. Some people use physical envelopes, while others prefer separate bank accounts. For instance, if you allocate $100 for gas, then either have $100 cash in a labeled envelope or a bank account designated only for fuel expenses. This method can significantly control overspending habits.
USING THE 50/30/20 RULE IN BUDGETING
This method allows the division of your income into three significant parts- 50% for necessary and essential expenses, 20% towards savings and debt repayments, and the remaining 30% (or less) for luxury spending like entertainment, shopping, dining out, and other non-essential expenses. This method offers some freedom for independent spending.
REVERSE BUDGETING
If saving takes precedence over everything else, then reverse budgeting would be ideal. This approach emphasizes savings before deciding on the remainder to spend for your chosen period (biweekly or monthly). It’s crucial to have a separate savings account for strict adherence to this method.
ZERO SUM BUDGETING
For those who find it hard to resist temptation and often spend any extra money they have, zero sum budgeting would be the perfect fit. It involves budgeting every dollar you have, thereby helping you in realizing your financial goals. Upon practicing this method, if any money is leftover from a particular category, it should be redirected towards debt settlement or savings. However, this method might prove a bit challenging for someone preferring a low-maintenance approach to budgeting.
Now, it’s your turn to take control of your finances. Choose a budgeting method which suits you best and stick to it! Take your time, do your research and decide on your money allocation strategy. Financial liberation awaits you!
So, which budgeting method aligns with your financial goals and lifestyle? Has budgeting been a challenge for you in the past, or is there something holding you back? Let us know!
