Whether you want to get out of debt, plan for early retirement or live life comfortably and within your means, one of the most basic things you must learn how to do and do well is to make a financial budget.But like most people, you probably hate to sit down and make a budget. You’d rather go on retail therapy, right? Shopping is more fun and exciting after all. Unfortunately, that’s exactly the kind of habit that will lead to debt and more financial problems.
Budgeting does not have to be complicated or restrictive like what many people believe it to be. When done right, budgeting can in fact give you the peace of mind when it comes to your finances and expenses. When you learn and master the science and art of budgeting, there’s really no one that benefits most but you. As the foundation of every financial, it is a critical habit that can change your financial life.
When learning about budgeting, one of the first things you must do is get acquainted with the two most important elements of every budget which are income and expenses. This is where the science aspect pops in. You must first know how much money is coming in from your paycheck and other sources like investment dividends, rental properties income and other passive income. The next step is to know where the money goes which may account your bills, debt payments, groceries, clothing and other expenses each month.
Another element that isn’t always familiar to everyone is known as evaluable. This is the part where you make an assessment as to whether the money that’s coming in is spent well or not.
The How of Budgeting
Most people are familiar with the concept of income and expenses. In order to stay out of debt, expenses should be equal or preferably less than the money that’s coming in. What’s left after expenses can be set aside for additional savings or other investments.
But knowing the concept is just the start. The really hard part is actually sitting down and making the budget. This is also the part where you inject your own special approach to the process. Remember that there is no one perfect budget for everyone. Each individual has different goals, income and expenses but there are simple guidelines to keep in mind when creating a budget.
The whole process won’t take you a day. A half to an hour is actually enough to keep the ball rolling. If you’re ready to make a budget, follow the steps below:
- Write down all sources of income
- Make a list of your expenses
- Categorize expenses according to fixed and variable
- Total both elements
- Make adjustments to expenses if necessary
- Recheck budget from time to time
The Bottom Line
Understanding the science of budgeting is just one part of the entire picture. It wouldn’t really matter that you take time to sit down and make a budget if you’re not going to stick with it anyway. The secret to budgeting, therefore, is having the ability to first create the budget then using it as a financial tool to help live within your means, avoid debt and grow your savings.