Struggling to pay bills on time, plan for a financially secure future, and save up for emergencies? If you want to feel financially empowered, achieving financial freedom is one of the best ways. How can you do that? The answer is to plan your budget. Creating a personal budget has many advantages. This post will help you understand its importance and give you steps to create your own budget.
What exactly is a budget?
Budgeting is a part of personal financial planning. Personal finance investing, spending and saving are integral to managing personal finances. A budget is a spending plan to ensure financial security. The plan includes keeping track of your income and expenses. Additionally, it requires you to stick to the rules you set for yourself by being committed and controlling your impulsive expenses.
Advantages of creating your budget
Helps you achieve your financial goals
What are your financial goals, say, five years down the line? Whether short-term or long-term goals, personal financial planning, i.e., budgeting, assist you in achieving them.
Avoids unnecessary expenditure
It is quite tempting for some of us to indulge in impulse buys. But having a budget helps you identify and keep a check on your impulsive expenditure.
Assists you with emergency funds
Creating a budget that serves your needs, wants, and savings for the future is crucial. This helps you avoid any financial turmoil in the future. It’s better to be prepared than to find yourself in a sticky financial crisis. You can start by saving as little as 10 to 15 $ monthly for emergency funds.
Helps you fulfill short and long-term plans
We have seen that one of the main benefits of a budget is avoiding unnecessary expenditures. This further helps you with making and sticking to your long-term plans. Long-term plans such as retirement and educational plans for your child require commitment. The finance industry emphasizes the importance of identifying your short-term and long-term plans and helps you cut back on unnecessary expenditures. In the future, you will thank yourself for coming up with the budget plan and sticking to it.
How to create your budget
Add up your monthly income
To begin with, ask yourself these questions. How much are your monthly earnings? How much is the take-home pay? Total the money you get from your work and any other income sources. Now that your total income is calculated focus on your monthly expenses.
Keep track of your expenses
Take note of where your money is going. How much is your monthly expenditure? Look into fixed expenditures that are regular monthly bills. How much money is needed to pay rent, mortgage, taxes, utilities, and insurance?
Post that, find out your variable expenses. These change from month to month and hence are called variable expenses. For example, groceries, home repairs, and hobbies and recreation.
Set financial goals
Setting financial goals gives you a clear picture of where you see yourself financially. As mentioned earlier in the benefits of creating a budget, setting short-term and long-term goals becomes necessary. So get on with setting financial goals.
Come up with a budgeting plan
Gather information on personal finance websites to help you with a suitable budget plan. You can pick a budgeting framework like the 50/30/20 rule. Focus and identify your needs, wants, and savings. After you identify these factors, implement the 50/30/20 rule. Allow 50% of your income to be spent on needs, 30% on your wants, and 20% on savings. It is a must to separate needs and wants.
First, identify your needs. Needs are absolute essentials that are to be paid, such as monthly bills.
Second, identify and track your wants. Wants include spending on a vacation or expensive clothing. Sometimes, your needs may overshadow your wants. In this case, it may go to more than 50% of your income. As a result, you may have to cut back on spending from 30% wants.
Third, make sure you put 20% of your income into savings. From the 20% savings of your income, you can use it for emergency funds, plans such as retirement, or paying off existing debts.
Stick to your budget
Now that you have created the budget, you must see it through to enjoy the benefits and thrive financially.
How to stay on budget? You can stick to the budget by tracking your expenses regularly, staying committed to the rules, and paying with cash instead of a credit card. This will assist you in avoiding temptations and impulse shopping.
You will notice financial security when you get better at creating and sticking to your budget. This equips you with future emergencies, financial goals, and plans such as medical plans and retirement plans. The only thing to be kept in mind is to stay committed. Additionally, try to create a budget that is not too rigid so that you can follow through for the long term. Modify it according to your changing needs, wants, income and expenses.