Budgeting is a process that is not necessarily implemented overnight. It takes several different steps in order to see the process through from start to finish. Here are five steps in the budgeting process.
It is difficult to figure out how much you want to spend each month without knowing how much you actually spend. Budgeting goes from aspiration to reality when you get a handle on how much money is going out each month. Of course, you need to begin with the bigger expenses, but that is honestly the easier part of this exercise. Where this gets challenging is in figuring out the smaller expenses that add up to bigger ones. This is the money that you spend on the margins on a daily basis that you think of as miscellaneous spending. The other difficult part of this task is in figuring out the occasional expenses that may arise once a year, but still take a bite out of your finances. For example, insurance payments and car registration expenses can require big checks, but may not be on a monthly basis. The final thing you need to realize is that you need to also add some money for the unknown, such as the emergency repair bills that hit you from time to time. Be thorough and exhaustive in this inventory and make sure not to cut corners here.
Once you know how much is going out, you need to detail everything that is coming in each month. For some, this part may be easy since you receive a bi-weekly or monthly paycheck. However, you may have some additional sources of income that you may not think of right off the bat. For example, you may get occasional money from a relative, or you may sometimes sell extra clothing that you no longer use. You also want to add in things such as any dividends, interest or rental income that you are receiving. One thing that you may consider doing here is also figuring out your possible income if you did occasional work on the side to get extra money.
When you are budgeting, one of the best things to do is start with a goal and work backward. While you can’t always exert your will on your budgetary situation, you can have a savings goal that you start with when making your calculations. This can also be a goal of taking a certain amount of money and using it to pay off debt. For example, you can decide that you want to put away $250 each month, and then you can figure out ways to reduce spending to accomplish that goal. The best goals to set are ones where you end up in the black every month. If that is simply not possible, it is critical to be able to at least reduce your expenses in order to stay out of the red. Recognizing that some expenses are unavoidable, there may still be some unnecessary spending that adds up and can be trimmed. Everyone seems to find a way to blame financial difficulties on a cup of coffee. While an occasional cup of joe may not be entirely to blame, the spirit of that sentiment does hold true. There may be some things that you are laying out money for that you would be better off doing without. By cutting these at the margins, you stand a better chance of ending up each month with a little extra. Ideally, your goal should be to save at least ten percent or more of your income each month. Without passing judgment on your spending priorities, we can say that the most important priority needs to be to either get ahead or less behind.
No budget plan can ever be effective without having a solid idea of how you are doing in following it. This begins with tracking your spending. You should be recording all of your spendings, practically down to the penny. Then, you should be comparing your spending against the goal that you have set for yourself at the start of the budget period. You should note where you have done well and where you have possibly fallen short of your target. The best part of this exercise is the satisfaction that you will feel when you have stuck to your budget and managed to save money in a given month. Another benefit to this exercise is that by tracking your spending, you are making yourself accountable to yourself as you will also feel disappointment if you are unable to stick to your plan.
While we are preaching discipline and setting and following goals, we also recognize that stuff happens, for lack of a better term. You should know that things come up that may bust your budget in a given month, and it will certainly not be a mark that you have fallen short. This is called life.
Another area where you need to be realistic is in accurately estimating your expenses. For example, your housing payment is what is due, and you should not underestimate that. There are some ways to lower your payment in certain circumstances, but you should be honest with yourself about your actual expenses.
You also do not need to lead an ascetic lifestyle, denying yourself at every turn. You are entitled to enjoy yourself in life, and every time that you spend something on yourself is not always a moment of reckless weakness. However, you should be looking for a middle ground, where you treat yourself well, but not at the expense of saving some money each month. Recognize that you may not follow your budget down to the penny, but make sure that you promptly get back to your plan in the event that you have a momentary lapse.
Budgeting is a stressful exercise. However, if you get good at it and follow the plan, you will start to see results in your personal bottom line.