CREATING A FAIL PROOF BUDGET

Creating a budget helps you control your finances. Every successful financial plan starts with a great budget. But many people find the six letter words very unpleasant. Most don’t know how to create one.

A 2013 Gallup report suggest that only one out of every three Americans create a monthly budgeting plan. As an individual, not keeping track of your money can be very risky. If you don’t track what you earn and spend, then how can you plan?

Everyone can benefit from a well-defined budget, no matter your income range. Whatever goal you have, a budget will help you achieve it quickly.

If you are one of those who find it difficult creating or sticking to a budget, then you should check out these steps to building a simple budget.

Determine your budgeting goals

When you have a reason for creating a budget, it becomes easier to see it through. It takes commitment and an absolute dedication to your goals to save part of your income. Your goal can be to save up to pay off debts, or to buy a new car or house. Knowing that the hard choices you make will lead to something you really want makes the process more palatable.

Calculate Your Expenses

The first step to crafting your budget is to determine your monthly expenditure. Determine the amount you spend on various items every month? You can know this by looking through receipts, bank statements, and other financial documents. Determine how much you are spending on bills, insurance, mortgage, feeding, clothing, etc. To get a more accurate figure, look through your spending on each item for the last 12 months. Also, add the money spent on minor expenses. Plan your budget with real numbers.

Know Your Income

The next order of business after knowing the amount you spend every month is to determine your monthly income. List out other income you make within the year asides your regular salary. These may include gift items, income from sales of household items, alimony, child support, dividend from investment, rent and interest.

Be realistic

Your budget shouldn’t be too tight. Have space for small spending, so it will be easier to keep to. You don’t just start saving 30% of your income every month. You have to grow the habit gradually. Your focus at the initial stage shouldn’t be on how much you save. Rather just ensure you save something every month and build the habit over time.

Also, it isn’t unusual to break your budget from time to time. You should just ensure you get back on track again.

Creating Your Budget

There are so many simple formats for creating a budget. It all involves dividing your income into several parts and spending only what is meant for what.

Your expenses can be categorized into three broad areas.

•      Static expenses

•      Variable expenses

•      Savings

Static vs. Variable expenses (80 percent)

Static expenses are “fixed” expenditures that you can’t influence. This includes credit card bills, mortgage, car loans, housing, electricity, cable television, transportation, and insurance. These expenses are almost the same every month and can’t be lowered. Your mortgage payment or housing bill will be the same every month. The same goes for water, transportation, and Insurance, maybe with a slight increase or reduction.

Since you know the likely amount to be spent on these, then your job is half done.

Variable expenses, on the other hand, those you can control. You can reduce or increase the amount you spend on these. Examples include clothing, feeding, groceries, restaurant meals, as well as unexpected expenditure. You can control how much you spend on feeding, as well as shopping for clothes, shoes and other necessities.

Set out 80% of your income for both fixed and variable expenses. What you do is to deduct the amount meant for the fixed expenses and allocate the balance to your variable expenditure. Subsequently, work to reduce the amount you spend on variable items.

Savings (20 percent)

Your savings is your seed to achieving financial freedom. The saving aspect of your budget consists of:

•      Retirement savings

•      Long-term savings

•      Emergency fund

If your employer doesn’t have a retirement plan for employees, then you should allocate 10% of your income to your retirement savings.

The long-term savings plan helps you meet-up your financial goals. Whether you want to purchase a car, renovate your home or pay up part of your loans, this part of your budget allows you to save up for these goals.

The Emergency Fund, on the other hand, is the amount kept aside for unexpected expenses like medical bills, car repairs, etc. It provides instant funds so you don’t have to resort to spending your long-term savings.

The budget can be shared five percent each for both long-term and emergency savings. Alternatively, the whole 20% can be shared equally amongst all three savings categories.

Most people will tell you to just create a budget and stick to it. But I’m not going to sell you that crap. Following a budget can be difficult. It requires discipline, which is built over the course of time. You need to build your budget to suit your lifestyle, so it allows you to plan your finance effectively