How to budget money effectively?
Did you know that…
>On the recent study of pymynts.com, it was found out that 6 over 10 of Americans are living paycheck to paycheck.
>87% of families have an average debt of $135,768 in December 2018?
>60 percent of millennials don’t know if they can pay their outstanding debts?
Did you know what that statistics mean? They only have one thing in common and that is improper management of money.
If you don’t want to be considered on that statistics, then probably you should continue reading this article that tackles how to budget your money.
Well, learning how to budget has a massive impact when it comes to your financial goals whether to increase your savings or investments, reduce your debts, and so on.
In addition, learning how to budget controls your day to day finances from personal expenses to household expenses.
Before we get started, let’s first define budget.
Table of Contents
- What is a budget?
- What do you need to make a Budget?
- Quick and Easy Steps How to Budget
- Budgeting Methods
What is a budget?
Budget is a written record that presents your cash inflow and outflow in a specific period of time whether weekly or monthly.
In some other words, a budget allows you to have full control of your monthly expenses.
Furthermore, a budget helps you reduce your expenses, decide how to spend your earned income, pay off your existing loans, plan for your future and eventually increase your savings.
In short, you should know how to budget because of its life changing benefits most especially when it comes to your financial goals. Creating a budget is not an easy task and sticking to it is extremely difficult.
Moreover, if you just created a realistic budget, you will see your life moving forward to financial success. Isn’t it amazing? That is why you should definitely know how to budget.
Are your financial goals found on this list?
✓Increase monthly savings
✓Buy a brand new car
✓Buy your dream house
✓Travel to your dream destination
✓Pay off credit cards and other debts
✓Invest in stocks, and other investments
✓Buy iPhone Pro 11
✓Save for retirement
✓Build and start a business
✓Save for plastic surgery in South Korea
✓Get new facial
✓Buy your favorite clothes and shoes
✓Renovate your house
✓Buy life insurance, and health insurance
✓Enroll in college and start a career
✓Become the next Jeff Bezos
Did you find some of your financial goals on this list? If YES, you should now start creating your own budget for you to achieve your goals. You have to remember that making your own budget will lead you closer to your financial goals.
If you’re dedicated enough to your budget, I’m pretty sure you will have a peaceful and better life in the end and at the same time you will experience a brighter future.
Before you start making your own budget, the very first step you have to do is to determine your financial goals. In this way, you will become more dedicated and motivated to the goals you have.
The main goal of this post is to help you learn how to budget your money. Without further do, let’s get started.
What do you need to make a Budget?
A notebook or journal and a single pen is totally okay. However, if you have a computer or gadget, then make use of it. Use your own resources.
If you have your own computer, I highly recommend you to make use of Microsoft Excel. It’s a software that you can use to easily create your monthly budget. You just have to enter the data on the cells and enter the data.
On the other hand, if you have your own smartphone, you can make your own budget using a reliable and easy to use app. I will tell you some of the best tools you can use below.
Quick and Easy Steps How to Budget
1.Understand your current financial situation
Before you start making your own budget, you have to fully understand your current financial situation for you to fully develop and establish a realistic strategy.
Check your assets
First, you have to think and check all things that you have or we can call this as your personal assets. This may include your car, home, job, bank accounts, investments and so on.
Determine your income
Second, determine how much income you receive each month. Your income is your best overall asset that has the greatest impact on your budget. Any amount of money you receive weekly or monthly is considered as your income.
7 seven types of income:
- Passive Income – income you receive from other jobs or business
- Dividend Income – income that you receive from your stocks investment
- Earned Income – income from paychecks
- Capital Gains – income from selling appreciated assets
- Interest Income – income from savings accounts, bonds and other deposits
- Royalty Income – income from own creations or inventions
- Rental Income – income from renting your properties
Identify your spending
Third, you have to identify your total spending. Do you spend most of your money on food, clothing or shopping? You have to identify and list your spending. Why? In this way, you will be able to identify how your money is being spent.
You have to know where you spend your money because if you don’t, you will end up living from paycheck to paycheck.
Identify monthly expenses
The fourth step you have to think of is your monthly expenses. This includes your grocery, house bills, insurance, rent, and so on. List your expenses together with your spending.
Check your existing debts
Here comes the depressing part. This are your debts. This may include your student loan, credit cards, mortgage, house loan, car loan and whatever loan you have.
After completing the steps mentioned above, let’s now assess your financial situation.
If you discovered that you have more assets than liabilities, I would like to congratulate you mate. The less liabilities you have, the lesser your chance of becoming broke.
Moreover, if your income exceeded your debts, you’re now ready to the next step. However, if your debts exceeded your income, you have to do anything to lessen your debts. Your debts might eat all your income.
“When it comes to budgeting, it is not the amount that matters. Rather it’s the habit.” -Stefan James
After understanding your current financial situation, you’re now ready to take the next level of budgeting.
2.Choose your preferred tools to make your budget
If you want to make your budget quick and easy, I highly prefer you to make use of online tools. This tools helps you to budget your money without any technical skills. Here’s the top budgeting tools I highly recommend:
– PocketGuard is the best budgeting app you can find online. You just have to enter the amount of income you receive each month and your financial goals you want to achieve. And Boom! There you go! It also tracks your monthly income, deposits to your savings accounts, your monthly expenses and more. However, the downside of this budgeting app is that you have to pay an amount before using the app.
– Mint is the second of the best free budgeting app. It offers you a wide array of features for you to easily track your money from different banks, lenders, credit card issuers, and other financial institutions. The advantage of using Mint app is that it notifies you when you over budget your money. In that case, you have to reassess your budget again.
–Wally is definitely a free budgeting app that helps you track your monthly income and expenses. In addition, it also offers foreign currencies so that people from other countries can easily use the app to ease their budgeting. If you want to use Wally to make your budget, you can download it on Google Playstore and the App Store.
– Quicken is the third of the best personal finance software today. It doesn’t only help you on your budget but it also helps you manage your debts, saving goals, and many more. Another awesome advantage of using Quicken is that it allows you to pay all your bills in just few clicks and it also helps you calculate your total net worth. This software is not free and you have to pay to use this software.
So that’s the best online tools you can use to easily create your own budget. Choose what your heart desires.
3.Evaluate and Assess your Budget
After making your own monthly budget, it’s not yet over. You have to evaluate and assess it before implementing it. If you found any errors, you have to check it and solve it right away. If your expenses are higher than your income, try to lessen your expenses and get ready to take some sacrifices.
In this part are the commonly used budgeting methods you can use for you to make your own perfect budget. Choose the method you’re comfortable with.
In this method, 50% of your monthly income will go for your personal needs (ex. food) while the 30% goes for your wants (ex: travel, shopping, leisure, entertainment, etc.). The remaining 20% of your income goes to your savings accounts. Always remember to prioritize your savings because at the beginning, you have your financial goals you want to achieve.
Monthly Income P80,000 ($1600)
Savings P16,000 (320)
Emergency Fund P5,500 ($110)
Groceries P10,000 ($200)
Rent P14,500 ($290)
Utilities P10,000 ($200)
Car Payment P10,500 ($210)
Travel Fund P5,000 (100)
Cell phone P500 ($10)
Entertainment P2,000 ($40)
Clothing P3,000 ($60)
Internet P3,000 ($60)
Take note that this is just an example of a budget using the 50-30-20 budgeting method. You can customize this table depending on your own expenses.
This is a very popular budgeting method nowadays. Generally, this method helps you allocate your income for you to avoid overspending. The main advantage of using this method is that it controls your spending habits. Once a category is empty, you can’t spend from that category until your next salary comes in.
How to use envelope budgeting method?
- First of all, you need at least 5 envelopes or more depending on your monthly expenses.
- Get a pen and write the category on each envelope.
Envelope 1: Travel Fund
Envelope 2: House rent
Envelope 3: Cable Subscription
Envelope 4: Groceries
Envelope 5: Car Payment
Some Additional Category
Loans/ Credit Cards
- After writing each category on each envelope, insert your desired bills on each category. Remember to prioritize your needs over your wants and always never forget to limit the costs. That’s the number one rule.
Envelope 1 (Travel Fund): P5,000
Envelope 2 (House Rent): P5,000
Envelope 3 (Cable Subscription): P500
Envelope 4 (Groceries): P3,500
Envelope 5 (Car Payment): P3,000
- The last step you have to do is to spend from the envelopes. Whenever you go shopping or pay your bills, take the money from the envelopes. Remember to stick on each category. Never attempt to get from other category or else you’re just fooling yourself.
Now you know how to budget your money. I hope this ultimate guide helped you a lot!
Budgeting is not only for those who earn higher paychecks rather budgeting is for everyone. It doesn’t matter how much you earn. The important thing is you know how to budget and allocate your money..
If you want to achieve all your financial goals, all you have to do is to manage your money in a right way. Budget! Budget! Budget! This is the only thing you have to do to avoid overspending.
You should be very careful on your money because it’s your biggest asset. If you don’t manage it properly, it will go away and will never come back.
In summary, knowing how to budget is extremely important because it helps you act like a business. It treats your personal finances as a business, you know exactly how much is coming in and you have a very good idea of how much is coming out which helps you build a more realistic budget and it allows you to allocate every single amount of your money into investments or assets that will eventually help you build wealth.
I hope this how to budget guide helped you make your own budget. Thanks for reading!
Stouffer, Tere (2012). The Only Budgeting Book You’ll Ever Need. Retrieved from https://www.pdfdrive.com