How to Make a Budget and Be A Little More Richer
Updated: Apr 20
Creating a budget can be so tedious, boring, and many of us never stick to it. Because of that, most of us hate budgeting. Some tend to create a money spending plan few days before the salary hits the account.
What's worse, the plan only covers several days, and you end up spending aimlessly. You may have a six-figure salary, but without budgeting, there is a great chance of becoming poorer. Let's learn how not to make such mistakes.
What is Budgeting?
First things first, what is budgeting? And what is it all about? Getting answers for these two easy questions gives us a perfect foundation for knowing how to come up with one and start getting richer.
Basically, budgeting refers to the process of developing a plan for spending your money. And the spending plan is now the budget. Coming up with this spending plan enables you to determine well in advance whether you'll have sufficient money to have or do things you need or wish to do.
In simpler terms, I can define budgeting as the act of balancing my expenses with my earnings. If you don't balance and start spending more than what you earn, there will be a big problem. That's when your debts start increasing every year.
So, if you don’t have sufficient money to meet everything you wish to do, this planning can help you prioritize your spending rates and concentrate on the most important things.
Why is Budgeting Important
Typically, budgeting enables you to formulate a financial plan for your money. Therefore, it ensures that you always have enough money to do your essential things. It also lets you track down your income and spending habits.
Other than that, sticking to a budget will also help you avoid having debts or enable you to find your way out of debts if you already have one. What's more, it allows one to start saving money for other important things like vacation, buying a new home, emergency or retirement.
8 Tips on How to Make A Budget that Will Help you Become A Little More Richer
Creating a financial plan that is effective and gives you a comfortable and happy life can be easy. However, you need to be honest about your income and expenses. This means that you must be able and willing to create detailed and precise information about your earnings and spending habits.
Plus, it will be more helpful to know what you are currently spending, decide how much you can afford to spend, and know your priorities. The following are our essential tips and advice on making a budget that meets your financial requirement and become richer.
1. Determine Your Income
Before creating a financial plan, ask yourself how much money is coming in each month? If you receive a regular paycheck that comes with taxes already deducted, base your spending plan on the net income.
As for self-employed or other sources of income, do your math and record the total amount as your monthly income. What if you do a seasonal job? Well, use the month during the last year with the lowest pay and use it for budgeting.
2. Define Your Purpose for Budgeting
You can’t start creating a budget and stick to it without understanding the reason(s) for doing so. Perhaps you have been spending recklessly, and you wish to control your impulse buying habits.
Or, maybe you have a debt repayment plan, and you want to settle your credit card debt as soon as possible. It could also be that you don't have a saving plan for long-term goals like buying a house, paying school fees for your kids, retirement, or handle emergencies such as medical bills.
Regardless of the reason, it is essential to clearly define the reason for wanting to go through all the work and hurdles associated with money management. So, before you start creating your spending plan, ask yourself the reason why you’re doing it.
Remember, the more you think about it, the more effective and detailed your reasons will be. Please write down the reasons and let them serve as your goals and values to work on.
3. Set Your Priorities
Budgeting is not always about dealing with numbers and calculations. It involves finding the best way to live your life best by improving the relationship you have with your money. This begins with figuring out what you need the most and only essential things. After that, syncing your spending and money-saving habits with your goals and values you set in (second tip).
If you have several different reasons or money goals, focus on the few ones that deem most important to you. It can be that you want to pay for household expenses, saving for retirement, settle your debts, or go on a vacation with your family.
When it comes to setting your priorities, honesty is the best virtue to have. If your priorities are dishonest and don't showcase your values, you will have conflicts when making critical decisions. As a result, it becomes tricky to stay motivated or focused on a particular task. So, make sure you don't fall back from the real you when creating a financial plan.
4. List All your Monthly Expenses
Writing down all the expenses to expect during a month is another critical step when budgeting your income. It may include:
Rent or mortgage payments
Utilities and insurance
Personal care and childcare
Loan payments like auto, student, etc.
Entertainment and eating out
Desired savings, investments, extra debt payments, etc.
You can use your shopping receipts, credit card, and bank statements from the previous three months to not down all your monthly expenses. After that, estimate how much to spend on total expense and for savings.
What if there’s no leftover money?
Well, take a deep breath. It’s possible not to remain with any money for saving after identifying all your monthly expenses if your money is tight. If so, you would want to reduce the expenses and savings. But don't ignore your money-saving plans while minimizing your spending habits.
5. Track Your Spending
Tracking your monthly spending is among the easiest ways to start creating a budget. To do so, you need to find the best possible ways to monitor your money outflow. This step is not only helpful before creating a financial plan but also after.
In other words, you can’t allocate a certain amount towards groceries without knowing the estimated amount you spend in a particular month. Besides, tracking your spending after budgeting allows you to make some changes as required.
It's not as challenging as you imagine. Long gone are the days where everything was recorded and balanced manually in a checkbook. With technological advancements in the finance industry, there are better ways to track your spending as you best desire.
You can use either budgeting apps or credit and debit cards. They are all dedicated to automatically track all expenses without asking for a lot of effort from your side. Interestingly, you can access it and get everything whenever you want.
Use a credit or debit card
A debit card is usually used to buy commodities first and paying them back later. On the other side, a credit card allows you to buy commodities that you can pay back in full every month. With these cards, you can track your spending by exporting the transactions of a given month to a spreadsheet.
Doing this can be pretty fun and also gives you a record of every coin you spend while using your card. The good thing with using debit or credit cards is that they usually categorize your daily or monthly outflows, making budgeting easier.
Use Budgeting Apps
Interestingly, there are plenty of money management apps that can help you set up a budget and monitor your progress. Instead of evaluating your spending manually to ascertain that you're on track, these handy apps can track your spending and provide you with timely information. Be sure to try mobile apps like Personal Capital, and You Need a Budget, including many others.
What's more, these money management apps and services often break down your spending into different categories. Therefore, it is faster and easier to see how much is spent on a particular item within a certain month with just a few clicks of a button.
Suppose you're not a tech-savvy person? There's nothing to worry about. You can do it with a pen and a piece of paper or notebook. Here, you'll have to record all your daily spending though this may be tiring and you can sometimes miss doing so. All you can do is choose the best method that will work well and effectively for you.
What you discover by tracking your spending may surprise you. For instance, even though you feel you're short of money every end month, you may earn enough money to cater to your daily expenses and still save money for emergencies, retirement, or fun.
Above all, knowing your financial position will enable you to determine where to go next. So, if you discover that what you earn is enough to meet your saving plan, you may figure out where to reduce and start raising an emergency fund or debt repayment.
6. Choose the Best Budgeting Style
When it comes to budgeting, you will never run out of approaches. Some are incredibly easy, while others are more detailed and complex. And there's no best method than the other. Just find the perfect method that best suits your desires and goals. Below are some of the most common budgeting styles to try.
• 50-30-20 Budgeting Style
If you discover that your net income is more than expenses, this budgeting style is the best for you. With this rule, 50 percent of your income goes to your essential needs like housing, groceries, food, insurance, debts, and utilities.
Then, use 30% to satisfy your secondary wants. Remember, they involve anything you can live without, but they help make your life richer and incredibly enjoyable. A good example may include paying for a monthly subscription to a video or music streaming service or monthly cloud storage for your files.
The remaining 20% of your net income can go to your savings. This may include anything like saving for a comfortable retirement, buying a car, paying for your children’s college fees, or going for a dream vacation.
• Zero-Sum Budget
As for this style, each coin that comes in gets assigned a task. In other words, the difference between the amount of money coming in and the one that’s outflowing must be equal to zero. This implies that you must be ready to figure out where exactly that income will go.
Besides, you have to categorize your spending into something like utilities, groceries, eating out, personal care, debt, car-related expenses, and so on. And if you have a few bucks remaining after settling all expenses, you must find a task they can cover.
Ultimately, the Zero-sum budget ensures that nothing of your net income is left in the air. Plus, every cent is accounted for and used as planned. To best use, this style, list down all the tasks you would want your money to do.
Opposite to the name, this style is a financial plan of sorts. Here, there's nothing to worry about spending your income on specific categories. In short, you pay as you move. However, it would help if you settled your priorities first and then make yourself the topmost priority.
What it means is that begin by saving money. After that, spend all the remainder as you like. By doing so, you won’t be bothered whether you spend more on groceries and above your limit for the month or feel bad for having spent a lot on clothing than you planned. The idea is, set your priorities right and spend all you have in the same order.
• Money Flow Budget
With this budgeting style, the work is a little bit more and involves some trial and error. But once you create it, you can even forget about it. First, determine how much you need to cover all the expenditures for every month. After that, design a money flow. Wondering how it works? Well, once you know all your recurring expenses, you create an auto-pay plan for each.
Ideally, this style lets you pay for expenditures like rent, utilities, including things like Netflix and cable through your checking account. Therefore, money will come in on a payday and out the moment your bills are due.
Then budget the rest of your income on other expenses like groceries, gas for the vehicle, entertainment, and so on. This, in turn, makes it easier for you to track your discretionary spending as you can also use your debit or credit card.
7. Stick To Your Budget
A budget becomes useless if you don’t use and follow it. After deciding on what is the best method to use, make sure you try it. As you live with your budget, some of the tools you can use include:
Spreadsheet – Regardless of the budgeting style you choose, it's essential to write some short notes and figures on a piece of paper. It may seem an old-fashioned way, but it will help you create your next budget and tweak certain items accordingly.
Digital Tools – As stated earlier, you can use money management apps to help you create, follow and track your spending plan.
8. Update Your Financial Plan Regularly
As we all know, budgeting is a continuous process. You set it up, live with it, check out what didn't work, and try it in a better way next time. Primarily, there are no strict rules about improving your spending plan.
The only catch needs to be your satisfaction. Are you contended with the way you spend your money?
If not, find out what the reason is. Some things you can have in mind when budgeting include:
Creating seasonal budgets
Match existing spending habits with new ones
Set dates for reviewing and tweaking your budget
Get help when you need it
Like what was said before, creating budget can be hard and isn't always fun. It's always better to see your finances on paper or on an app and actually have control of them.
Take back your finances and control them, don't let it control you!