Many of us tried to stick on a certain budget, but sadly most people keeps failing. Some even go through steps that they managed to read on published books by known financial authors, but when applying it to real life, something comes up and one can’t stick to it and fail.
So, what’s wrong?
If budgeting is a total disappointment for you, the best way for you to do is by looking at the fundamentals. Missing out the fundamentals can transform a well-formed and even planned budget into a total disaster.
Before leaving and closing out the page tab, why not try our ten powerful things for you to build a budget that will lead you towards success?
1. Identify the Purpose of your Budget plan
“If your concept is to plan a budget because they say it is a good practice”, trust me with this idea, this won’t help you further in the future and its totally useless.
In the same way, if you are just following your personal finance workbook because it says that this is a great way towards having a financial success in the future, still budgeting won’t help you at all.
The main concept of budgeting is just to help any individual spend less on what they actually earn.
This can be based daily or even monthly or more. Humans have spending weaknesses and this is fact. Most people spend money without even thinking its main purpose. They just keep buying things because it attracts their attention without even thinking the possible after effect.
Identifying your budgeting purpose is not the solution itself, but this concept will be your guiding track towards effectively minimizing your spending habit on the money you earn.
2. Set a specific long term goal
For most people ‘debt is freedom’ saving with a purpose. To make it clear, setting a long term goal or something that will have a big impact in the future will help you a lot. With this, planning a budget will become useful.
Based from the initial statement that we have, effective budget is connected with difficult choices and this can lead to even sacrifices.
Difficult because, you will be cutting down some of your regular spending like entertainment and even other things in your life will be affected and for sure this will reduce your regular activities, in other words you are regulating your cash flow.
But by knowing these choices that it will add something tangible or something that you want, it will make your budgeting even more palatable.
Setting a specific goal will help you emphasize the importance of preparing a budget. But without any goal, budgeting will become useless.
3. Compute how much you make
Your annual salary is not the correct answer, nor dividing one year salary to twelve for your monthly budget. But instead you should base your budget on your net take home pay each month.
Let us do the simple Math, if your annual salary is $60,000, you are knocking around $9,000 in your income taxes, and much even more when you look at other benefits that will cost you paying more for them, like insurance on health. So using $5,000 a month as your budget basis isn’t correct.
The correct number might be closer to $4,000 or even below than that.
So with this data, make it sure you know your exact net take home paycheck, because this will be the number that you will be using when you set your budget plan.
Do not just imagine things “imaginary figures” and then decide, include all the possible necessity and all the adjustments so you will not be frustrated in the future.
4. Make sure your data is accurate in terms of spending
Likewise, when you decide to plan your budget, it will work best if you do it based on numbers that are not imaginary figures. This simply means that you need to collect your total bills and receipts for at least the last month or even all of them. After pulling all the real data, figure out your actual spending each month.
As a start, your first budget should not be the actual budget, but instead this will be a reflection of your average monthly spending.
Remember in setting up your data, the irregular bills like
- health insurance,
- auto insurance,
- property taxes,
- car licenses
- and others.
These things should not be on the “unexpected surprises”, but instead this should be properly noted throughout the year by allotting proportion each month.
And make sure not to miss it out, as these elements will help you out when things go wrong in the long run. Eg. Health insurance can back up hospital bills in times of unexpected sickness, so your budget plan will not be much affected.
5. Have savings and checking account that have budgeting tools
Try to ask these questions on yourself,
- Does your bank offers automatic transfer from checking to savings account?
- Does your bank offer online payment on bills?
The answer should be ‘Yes’ on both questions.
So now let us go to the next questions,
- does your bank regularly charge fees on maintenance purposes of your account?
- Do you have to pay more on your ATM transactions?
Answer should be ‘No’.
To make it short, if your bank has these things, they are actually doing things that will make budgeting even more successful. There are numbers of banks that offer amazing features like automatic transfers, no maintenance fees, online bills payment, no ATM fees and even offers a nice interest rate.
Every country has its own business platforms. You just need to gather the right information for you to maximize your budgeting plan, so we strongly advice that you visit your nearest bank now and gather the needed information.
6. Stay simple and clear
Start from scratch, you can use anything at your own convenient, pencil and paper will do, simple budgeting tool that you can understand and access it immediately.
If you start things by using the latest budgeting software available today, surely you will be overwhelmed on the software and the numbers of option available, and for sure this will become even harder on your part to convince yourself on your budgeting goal (we are not saying that those new software’s now are useless).
We strongly suggest that your first budget should be easy to manage and use and you understand every single detail of it inside out.
That is why using pencil and paper on your first budget plan is the best way to start. But if you insist and decide to move to something even more advance or in form of electronic format, you can choose a budgeting software that suite your need, we will not recommend one but instead look for something that you are comfortable of using.
But if you have Microsoft Excel or LibreOffice Calc installed on your computer, you can use it (most people are using Microsoft software, easy to access and easy to use).
One’s again, we are not emphasizing not to use those new software’s. Honestly, they are great. But the problem is the complexity of the available options that will overwhelm a newbie user and like any normal reaction, once overwhelmed, user might end up saying “budgeting is way too much complicated” and we don’t want that to happen to those who are planning to do some budgeting.
So the key point is to start using simple tools, then later on move on the new level. You can even use more complex ones if you feel that there is a need for you to do it.
7. Be Practical
Like any diet planning, budgeting is somewhat similar – this will not work if you design unrealistic assumptions.
So, if you are on diet, getting rid of lettuce and the tofu might work for few days, but later on it will crack you down.
So to be realistic with your goals, it will be a better solution if, instead of drinking coffee with sugar every morning, you can instead use low fat coffee version with sugar free and instead of eating double cheeseburger during lunch, you can bring your homemade cut sandwich. In short, small steps are more effective than doing big steps which results to failure.
In budgeting, same rule applies. Don’t even pledge to trim down your spending on entertainment by almost 80% (this will not work in the long haul).
But instead, use the average data of what you have spend for entertainment few months ago, cutting around 5 or even 10% below is ok and if you succeed trim down again a bit more. Going whole hog will always end in total failure in the long run, so be practical do things that are achievable.
8. Get a Mentor or have at least one that will support you
If you are attempting to create a significant change in life this suggestion should be carried out. Take note, budgeting is an indication that you are aiming for a total transformation on your financial status. And things become easier with someone who will support you with all you do. You can ask your parents, your closest friends or even your spouse for their help.
And if you are surrounded with a group of individuals that is committed with overspending, honestly you are in the middle of unhelpful support. This kind of environment might even result to the abandonment of your financial plans.
Take tentative yet simple steps to look for less materialism oriented community to spend time with. After all, if you are thinking of a budget, you are then thinking of a momentous direction shift in terms of money choice, take it as a step and uncover support that will be on your side along the way with your new choices.
9. Set achievable short term budgeting goals
As we said on our second statement “Set a specific long term goal”, these goals are good for your specific course, but they don’t help much on your daily choices. It is way easy to convince yourself that small slip-up won’t hurt your long term goals (but reconsider everything and try to fix adjustment and analyze how this affects others designs).
Developing short term budgeting goals can be a powerful solution for you to go with your designed long term budgeting goals.
You can set weekly budget for food or even set monthly budget for entertainment so you can go out guilt-free if you are still on the safe budget radar for the month, ‘simple motivation work best’.
10. Adjust things even radically
Never be afraid to adjust things up, even if it happens to be a total budgeting plan, there will be moments in which you will discover something or there are component of your designed budget which was not right.
It is not reasonable just because you forgot some key information while designing your plans and this will result to a total waste of your overall effort.
Relax and do not panic. Never abandon your started plan, just look back into it and do the necessary adjustments, and you can even start over again. Things like this is normal to human, it happens not only to you, but almost to everyone, so do not worry. It does not imply that your budget design was a total failure, it just need some finishing touches so it can evolve to the next level.
Preparing and sticking with your planned budget plays an important role being responsible with your money management. Whether you got few bills, or even you are tasked to pay for household expenses, understanding the money you have and where to spend is the key fundamental step in achieving your financial independence.
Your financial blueprint is important, it is like building a house, and it needs a blueprint.
So think consider your budget as blueprint for your financial transformation. Budget blueprint is the basis of good financial habits that helps you avoid problems and pitfalls that may arise in the future.
Just to recap, “track where your money was spent”. Take few of your bank statements, pay stubs and receipts that you have for at least a month or much better three months so you can check your average. As being said, having a snapshot of your expenses take-home pay and your savings will help you fill holes by estimating money spent on entertainment, food and clothing.
The formula is simple “Income − Expenses = Reality”, if you are fortunate, and added your expenses less from you take-home pay monthly, you will have some money left over. This left over is that money that you can save.
“Need Vs Wants”
So take a look at your total expense, food is necessity and that is fact, but there are certain elements that can be adjusted.
- Instead of spending coffee from stores, you can make one at home. This one saves you around 3$ a day or more.
- Another thing, paying for premium package on your cable, do you really need those extra channels?
What I mean is when you look at your regular expense tagged as “need Vs wants,” you will be surprised how you can adjust things in much lesser.
If you cut your monthly expense due to your monthly budget, but still deficit, this is the time for you to think for possible way to increase your monthly income. Most people do it by getting another job or “second job”. Babysit on your neighbor or have a tutor job.
It depends on the skills you have, identify it and make use of it, just do things that you love to do and this will reward you with something good. If you think you can’t do it, you can do other stuffs like garage sale and sell your unwanted goods. The idea is to turn your “hobby into business”.
Before we forgot “Managing your liability”, if you have monthly credit card payments, consolidate them in one monthly payment. If possible close your old accounts, if you struggle with student loan, contact the lender and apply if you qualify for a loan consolidation or repayment options.
So once you are approved, plan smarter with your strategy. So instead of equal payments on your loan debt, concentrate on the one that has the highest interest rate, and when balances are paid go to the next one with the second highest interest and so on.
Doing a budget helps you evaluate your spending habits, and creates good relationship with money. Like any normal relationships, this needs to grow and you need to lean it diligently. The main basis of money relationship starts with budget plans, your sincerity and care of course, and afterwards this will transform you into financial well-being.
Implementing your budget plan rewarding, just don’t do it forcibly do it naturally and slowly you will notice the improvements in your financial status as you apply your budget plan.
Table of Contents
- 1 So, what’s wrong?
- 2 1. Identify the Purpose of your Budget plan
- 3 2. Set a specific long term goal
- 4 3. Compute how much you make
- 5 4. Make sure your data is accurate in terms of spending
- 6 5. Have savings and checking account that have budgeting tools
- 7 6. Stay simple and clear
- 8 7. Be Practical
- 9 8. Get a Mentor or have at least one that will support you
- 10 9. Set achievable short term budgeting goals
- 11 10. Adjust things even radically
- 12 Final thought: