5 Simple Steps to Creating a Budget
Financial planning is crucial if you want to live a comfortable life and a secure future. But you can’t plan well for your finances if you don’t have a clear budget in place. A budget is your first path to financial freedom. So, how do you create a budget that can work in your favor? Here are five simple steps that will help you create a more realistic budget.
Consider Your Net Income
Calculate what you earn every month after taxation. Your net income should be any money you’re getting monthly from either your employer or your business minus the taxes.
Make sure you leave out all the deductions from your paycheck when making your budget. Some of these deductions include health insurance, retirement benefits, and any flexible spending account.
Take into account all your income sources. Don’t forget that side hustle as long as it supplements your income. Don’t include any personal loan in your budget. Don’t include gross pay as well.
Track Your Expenses
Spending only on essential things will help you create a workable budget. If you don’t track your expenses, you won’t understand where your money is going. You won’t even account for your last paycheck.
You can break your expenditure into groups such as food, housing, utilities, and transportation, so you have a clear budget. Keep on reviewing your expenses to know whether there are adjustments or there’re some reductions.
Differentiate Between Needs and Wants
If you want to achieve any financial goal, you must identify the things you must have and those you can do without.
Of course, those should be the thing you spend money on. Don’t accommodate things that aren’t important in your budget.
Avoid impulsive buying by planning for every single purchase. Just because you woke up in a happy mood doesn’t mean you treat yourself to something you won’t even use. What’s the need to go on vacation or buy a car, yet you’re struggling with your finances?
Your Spending Shouldn’t Outpace Your Income
Make sure you don’t spend more than you earn. Well, sometimes the income exceeds your earning. If this is the case, find a side hustle or look for a better job. If getting an extra source in income is an uphill task, consider cutting down your expenses.
You can reduce your expenses even if it means denying yourself some luxuries until your income grows.
Identify the most important things to you and include them in your budget. Remove those you can do without. By doing this, you’ll at least have some money to save for your retirement.
Don’t Forget Your Financial Goals
Have a clear purpose for coming up with the budget. Before you even start working on the budget, define your financial goals. Why do you have to save? It is for retirement, building a house, going for a vacation, or responding to an emergency.
Come up with the amount you’ll need to save every month to achieve your goal. A financial plan will act as your source of motivation, and you’ll be happy if you reach it.