One of our goals at AfricaX is to help our readers to achieve financial independence. We do this by providing tips and resources that we believe will be useful. If you missed any of our previous articles on finance, you can read them here. You can book this article and come back to it later. If you are a business owner, you can check out our business articles. This article will focus on how to create a personal budget. You may be wondering why we are talking about this today. Read on.
What is a budget?
According to Cambridge dictionary, a budget is “a plan to show how much money a person or organization will earn and how much they will need or be able to spend“ In summary, a budget is a plan that helps you manage your money. A budget helps you figure out how much money you get, spend and save. On the other hand, budgeting is the process of creating a spending plan for your money. It is a planning and forecasting process which helps you balance your expenses with your income.
Why do you need a budget?
According to Investopedia, below are the 6 reasons why you need a budget.
- It helps you keep your eye on the prize
- Budget helps ensure you don’t spend money you don’t Hhve
- It Helps Lead to a Happier Retirement
- Allows you to prepare for emergencies
- It helps shed light on bad spending habits
- Budget is better than counting sheep
Are you still not convinced yet that you need a budget? Read the 6 points again. If you spend more than you make, you will soon run into a problem. Your rainy day might be closer than you think.
Aside the reasons stated above, a budget is especially important if you:
- don’t know where your money is going
- have a problem with paying yourself first
- don’t save regularly
- have problems paying off your debts
- feel like you’re not in control of your finances
- want to make the most of your money
Steps to take before you create a personal budget
Now that you understand why you need a budget, you will find below what you need to consider.
- Establish your financial goals: Know what your short-term and long-term goals are.
- Know where your money is going. The best way to do this is to keep a money diary.Tracking your money will help you figure out what comes in and what goes out of your pocket.
- Evaluate your needs and wants. You need to know the difference between your needs and your wants. A “need” is something that is required or essential. For example, clothing, food, or medication. A “want” is something that you would like, but do not necessarily need. For example, meals at a restaurant or designer shoes.
Please note that your needs and wants may also change over time. So, watch out for this as you prepare your budget
How to create a personal budget
believe you understand what a budget is now and also why you need one, Follow the steps below to create your first budget.
Step 1: List your income, savings and expenses
In order to be able to do this, follow the steps below to understand your current situation
- take your recent pay stubs, bills, and bank statements
- Open an excel document a piece of paper or the budget app you chose
- enter the amount of your income, savings and expenses into each category you have created
- if you can’t find a category for any item, create it
By the time you finish this process, your expenses section may include
- Mortgage payments or rent
- Car payments
- Insurance (household, car, life etc.)
- Utilities (electricity, gas, water etc.)
- Personal care
- Eating out
- Childcare (if you have a young child)
- Transportation costs
- Travel or vacation
- Loan payment (student loan, credit card etc.)
Step 2: Separate your expenses into fixed and variable
The critical next step is to separate your expenses into fixed and variable. Fixed expenses are mandatory expenses which require you to pay the same amount each time. This can include mortgage or rent payments, car payments (if you have car), internet service, and regular childcare (for those with young children). If you plan to pay yourself first, add savings to your fixed expenses bucket.
Variable expenses are expenses that change from month to month. This may include groceries, entertainment, eating out or even amount you spend on gifts. After this, assign an amount to each category, starting with your fixed expenses. Then, divide the rest among your variable expenses. For most people, your income is probably fixed monthly. So, the total of your fixed and variable expenses should be equal to or less than your income.
If you’re not sure how much you spend in each category, review your last two or three months of credit card or bank transactions to make a rough estimate.
Step 3: Make necessary adjustment
If you complete step 2 above, you will have an idea of what your monthly income and expenses look like. It will clearly show you where your money is going and the necessary adjustment you need to make. If you find yourself in a situation where your expenses are higher than income, you need to adjust your budget. Find areas in your variable expenses bucket that you can cut or remove. Instead of planning to eat out, you decide to pack your lunch more often,
However, if you find out that your expenses are still far above your income, reducing your variable expenses may not be enough. You may need to let go of some items in your fixed expenses in the meantime while you work on ways to increase your income. Your ultimate goal is to have your income and expense columns to be equal.
Step 4: Monitor your budget religiously
Creating a budget is the easier part. You need to ensure that you follow the budget to the letter. This involves you tracking your expenses and income religious. Also, it involves denying yourself of some things if you notice that your expense is going haywire. As you start out on this journey,, keep an eye on how much you have spent. The moment you have reached your spending limit in a category, stop that type of spending for the month. Resist the temptation to move money from another category.
Step 5: Stick to your budget
Constantly evaluate your budget. If you notice that your actual spending often varies from your budget, re-adjust the amount against each item. Ensure that the figures in your budget are realistic.
As you operate your budget, do the following:
- keep all your receipts and bills
- limit your spending to what is in your budget
- constantly update your budget with any changes, for example, a pay raise, a bill increase, etc.
- compare your budget to what you actually spend at the end of each month and make necessary adjustment.To do this every month, you can book a time in your calendar. This ensures that you don’t forget about this important task.
Continue with this exercise every month and it will soon become natural to you..
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