An easy guide to effectively create a budget

girl counting the money

Most people find creating a budget a daunting thought, but in reality it doesn’t have to be. Once you understand how to go about it, you will find that making a budget is actually a set of logical steps that are quite easy to follow. Here are the basics of efficient budget creation:

Monitor your spending

Before you actually make a budget, the very first step is to monitor your spending. It makes no sense to assign some arbitrary numbers to your expenses, and then try to manipulate your spending to fit those numbers. To track your spending, take note of how much you spend in a given month, including everything from regular expenses such as groceries to more spontaneous spends. For this, you could an Excel spreadsheet, or even smartphone apps, you can fine plenty of such apps.

Sort your expenses

Now that you have an idea of where your money is going, try to sort out your spending. Two easy categories to start with are “fixed costs” and “flexible spending”. Fixed costs include things you will spend on each month, with little variance in the amount. These could be rent or mortgage payments, phone bills, internet bills, car payments, gym memberships etc. Flexible spending consists of spending on things that can vary from month-to-month. Examples of flexible spending are eating out, shopping, entertainment and even groceries. Once you have this down, compare your fixed costs and your flexible spending.

Consider your monthly income

There are a surprising number of people who don’t consider their monthly income while making a budget, causing them to overspend without realizing it. This may seem like re-stating the obvious, but the whole goal of budgeting is so that you don’t overspend – and so it really is integral to take your income levels into account!

Consider your financial goals

Write out any and all financial goals you may have. Do you want to pay off a loan by a certain time? Do you want to buy a new car? Knowing your goals will help you define your priorities. It’s well known you can’t have everything you want, but you can direct your money toward the things you want the most.

Consider your savings

It’s always a good idea to save for a rainy day. In most cases, the recommendation is to set aside three- to six-months’ worth of living expenses for an emergency fund in case of job loss, illness or an unexpected bill. You might also want to consider setting aside a certain portion of your monthly income towards retirement, especially if you have plans to retire in another city, or even abroad, as research shows that this can be quite expensive and requires advance planning.

Put it all together!

Now that you’ve considered the main aspects of your personal finances, you need to put it all together. An Excel Spreadsheet, or even a physical accounts book works just fine for doing this. For those who want to access your budget anytime and anywhere, there are a whole bunch of budgeting apps that allow you to constantly track your budget on-the-go.

First, allocate an amount to all of your fixed costs such as rent, bills etc. by spreading them out into various sub-categories. This should be based on your actual spending and you will have to spend these amounts each month.

Personally, I like to allocate a lump sum towards groceries, even though the amount I spend on them varies by month. I always choose a figure that’s a little higher than what I would usually spend, knowing that I can always put the remainder into my savings. Second, allocate a certain amount that you will set aside to meet whatever financial goal you choose. Lastly, and based on what you have left, allocate a certain portion of your income towards your savings. Remember to always put this portion of your income into your savings before spending on any other miscellaneous expenses. Ideally, this shouldn’t harm your budget since this portion was allocated while keeping in mind all your expenses and goals.

If your expenses are exceeding your income, then you will have to find areas where you can cut down on your spending. Most likely, you will find some places in your “flexible spending” or “extras” where you will be able to save some money. Alternatively, if you find that your income largely exceeds your spending, don’t go on a spending spree – put your excess income into your savings or use it to meet your goals. In the long run, you’ll be happy you did so! Ultimately, you have to remember that you will only be able to stick to your budget if you are living within your means.

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About the Author: James Watt

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