Top 5 Budgeting Tips You Weren’t Taught in School
Do you feel like your personal financial situation is out of order? Or are you getting into a financial crisis time and time again? Maybe it’s time to go back to the basics that is, create a budget.
Budgeting is an integral part of a healthy financial life. It helps you get intentional with every coin that comes into your wallet or bank. A budget offers a clearer picture of what you are earning and where it ends up every month.
Whether you want to quickly get out of debt, save for heydays, or achieve financial freedom, it’s easier with a financial action plan. A budget can help you stay on track to meet your financial goals.
When you make a budget based around something as simple as spending your money intentionally, you won’t feel trapped. Actually, you’ll get even more freedom to spend your money without any of the guilt.
In fact, a considerable number of people have confessed to finding ‘extra cash’ after creating a realistic budget and sticking to it. Isn’t that amazing?
1. Calculate your net income
First, identify the exact amount of money you get every month. For those with a fixed salary, that will be your net pay.
However, if you have more than one source of income or if your revenue varies every month, you need to estimate the total net income. A good rule of thumb is to use the lowest amount you have ever earned within the last year or so.
Calculating your net income lets you understand the exact amount of money you need to budget for.
2. List your monthly expenses
The next step is to create a list of your monthly expenses. To do that, you’ll need to understand the difference between needs and wants.
First, prioritize your list to begin with the essentials. These are the types of items you cannot go without.
To list essential things, ask yourself, “If I had the worst month ever and only managed to earn just enough to pay for only the basics, what would they be?” Some good examples of basic monthly expenses include housing, food, clothing, and transportation. So, you should give these items priority when making a budget.
Next, list the items that come in second. These items are equally important, but they come only after you’ve handled your basic needs. You can include things such as savings, loan payments, debt, and insurance as your second most important budgeted items.
Thirdly, list the items that make your life better and more comfortable. These often include entertainment, cable, a gym membership, and a cell phone.
You can use the 50/30/20 budget rule to guide your spending habits. The rule suggests that at least 50% of your net income should go towards essential needs, 30% goes towards your wants, and at least 20% goes towards savings and repaying debts.
3. Organize Your Expenses into Fixed and Variable Categories
Monthly expenses can either be fixed or variable. For example, most bills remain fixed. Some of the fixed expenses include rent/mortgage, groceries, transportation, insurance, tuition fees, and debt repayment.
On the other hand, there are also those expenses that vary from one month to the next. These are items such as entertainment expenses, gym memberships, takeout orders, or vacation expenses.
Categorizing your expenses into fixed and variable categories helps you to identify the items that you’d cancel or postpone first if your income were to decrease. The variable category could be done away with without much fallout, unlike the fixed group. For example, you can decide to cancel a vacation or gym membership without much distress, but you can’t avoid paying for rent, groceries, or transportation.
4. Determine the Average Monthly Cost for each Expense
Once you’ve marked your fixed and variable expenses, then list the monthly cost of each expense. To get the precise figures, refer to your credit card and bank statements.
Typically, most fixed expenses like rent incur the exact cost every month. You may also have a few variable expenses like a gym membership with a set cost month-to-month. So, with these, it’s easy to find the total cost.
However, there are plenty of variable expenses and even a few fixed expenses with no preset costs. For example, when paying for takeout orders, household goods, or groceries, the cost often fluctuates.
So, to estimate the average cost, you’ll need to do some calculations. A general principle here is to add up all expenses you’ve incurred in the past three months and divide by three.
5. Make Adjustments
This is the final step in your budgeting process. It involves comparing all the information you’ve collected and ensuring the figures work out nicely.
For example, compare your net income with your monthly expenses and determine if you have sufficient cash to cater to all your expenditures.
If things seem constrained, consider making some lifestyle adjustments. You may be able to come up with ways to cut costs.
Some of the easy ways to cut costs include:
- Reduce the money that goes to variable expenses, like saving for vacations, cutting streaming subscriptions that you rarely use, etc.
- Consider adjusting some fixed expenses whose costs fluctuate often.
- Add digital coupons to your card beforehand when doing grocery shopping.
- Choose store-brand items as opposed to name-brand to save a few bucks.
- Move to a cheaper apartment with lower rent cost.
- Avoid dining out or grab-and-go orders. Instead, opt for homemade meals to save a few bucks.
Alternatively, you may find ways to make additional income. Some of the things you can do to make extra cash include:
- Taking a part-time job.
- Finding a freelancing gig to do during your off-days.
- Taking on weekend gigs.
- Creating a passive income (for example, starting a Youtube channel).
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After creating a budget, it won’t help if you don’t stick to it. To help you stay on track, use a budgeting app and set up reminders to log all your daily expenses into your budget.
You can also set alerts with your financial institution to notify you if you approach a specific predetermined spending limit. But, above all, learn to hold yourself accountable.
Remember, a budget aims to help you understand whether or not your income is going towards things that you’re proud of, happy with, or aligning with your goals. So, follow through with it to help you stay on track with your money matters and achieve your financial goals.
Amanda is a senior writer at AdvanceSOS. She has more than six years of journalism experience, mostly in the finance sector. She graduated with a Bachelor’s Degree from Drew University.