8 Steps to Easy Budgeting

8 Steps to Easy Budgeting

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Budgeting is an essential step to achieving any financial goal. It helps you efficiently manage your spending to save up money for whatever short-term or long-term expenses that you’re planning to have in the future.

If you’re planning to take out a car loan, for instance, you need to provide a substantial amount of money for the down payment. Often, this money is obtained through savings. However, you can’t save enough money unless you learn to budget effectively.

What is Effective Budgeting?

Budgeting is the process of creating and following a spending plan, which is called a budget. The budget usually covers a certain period like fortnightly or monthly and strategically starts around the same time you receive your fortnightly or monthly income.

An effective budgeting strategy helps you allocate enough funds to cover your essential needs while contributing regularly to your savings fund. For instance, if you receive your salary every two weeks on the 15th and 30th day of the month, your budget ideally covers 15 days—from 31 or 1 to 15 and from 16 to 29. Within this period, you should be able to allocate enough funds for your necessities and a few luxuries while also putting aside funds for your savings and investment until your financial goals are achieved.

Types of Budgeting

There are a lot of budgeting models that you can use to efficiently manage your finances and achieve your financial goals. The most popular ones include:

1. Line Item

This simple method involves the identification and listing of all of your expenses, both necessary and discretionary. You can break everything out into detailed categories, like “grocery”, “transportation” and “savings”. By listing out everything, you can see exactly see where your money goes. You can also better understand your spending behaviour and make necessary adjustments to reach your financial goals, including getting out of debt.

Line item budgeting is beneficial if you are a splurger who want to get your spending behaviour under control.

2. Pay Yourself First

As soon as you receive your salary, you send a portion of your income straight to your savings account before spending for anything else. Without any strict and boring budget categories to follow, you’ll be able to allocate a specific amount to your savings and spend the rest of your income according to how you want it to. You will also be forced to make ends meet without feeling overwhelmed by the thought of budgeting your finances.

3. Envelope Method

In this method, you need to identify your major expenses—such as “food”, “utility bills” and “savings”— and assign an envelope for each category and label them accordingly. Then, identify your budget for each category. Fill each envelope with cash equal to the amount you’ve allocated. Use the cash from each envelope strictly according to its intended purpose.

This means that if you’re buying food, you cannot take out money from the envelope labelled “savings”. If you’re running out of money from the “food” envelope, you either need to get creative with the available funds or stop buying food altogether until your next budgeting period. If you have money left on several envelopes, deposit them to your savings account. You can also adjust your budget for each envelope when the new budgeting period starts.

The envelope method works best if you can’t control your spending with debit and credit cards or simply not comfortable using plastic.

4. Proportional

Proportional budgeting method includes the 50/30/20 and 80/20 rules, which both assign specific proportions of income to different spending categories.

The 50/30/20 strategy breaks down your income into 50% necessities, 30% discretionary spending and 20% savings and investment. The 80/20 method works the same, except that it doesn’t differentiate between needs and wants but simply 80% expenses and 20% savings.

Whatever proportional budgeting method you follow, it helps you figure out how much to spend and how much to save without following a super strict budget plan.

5. Zero-Sum

Your goal is to have nothing left out of your budget at the end of the budgeting period. All of your money must go to something—food, bills, debt repayment and savings. Every dollar must have a purpose because any “untouched money” will likely get spent carelessly.

However, you need to get a month ahead of your finances to adopt this strategy. Save a month’s expenses and use the funds for your budget on the following month.

The zero-sum method will work best for you if you always have money left at the end of the month, but end up spending it on unplanned and unnecessary expenses.

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How to Make Budgeting Work for You

No matter which budgeting strategy you follow, make sure not to spend more than what you are earning and always keep track of your spending to identify areas for improvement.

Here are simple steps to make budgeting work for you:

Step 1: Make your goals realistic and attainable.

Aiming for a $10 savings every month is more doable than putting aside 70% of your monthly income to savings while struggling to pay for necessities. While it’s good to aim for bigger savings and challenging yourself with an almost impossible financial goal when creating your budget, you might get overwhelmed, lose interest and ultimately give up if you feel deprived.

A small savings goal can be easily attained without taking away your comfort and relaxation. It also gives you a sense of fulfilment once completed, encouraging you to save more and continue building your financial future.

Step 2: Never skip the basics.

Regardless of the budgeting method you follow, make sure that it includes:

  1. Identify your total take-home income. Your income may not only be limited to your full-time job. List all your sources of livelihood if you have a freelance job, gigs, business, rental properties and Social Security checks
  2. Identify all your expenses. List all the expenses you could think of—from daily necessities like food to regular bills like water and electricity to quarterly payments like insurance or homeowners association fees. Make sure that every dollar you spend is included in the calculation of the total expenses.
  3. Subtract expenses from your income. Make sure that your expenses do not exceed your income. Otherwise, it contradicts the goal of budgeting, which is to live within your means and to spend less than you make.
  4. Always keep track of your expenses. Aside from efficiently managing your finances, another important goal of budgeting is to better understand your spending habits to improve your saving and wealth-building strategies. This can only be done by expenses tracking and budget monitoring.

Step 3: Differentiate between needs and wants.

It’s easy to distinguish expenses from savings, but can you differentiate needs from wants? Needs are the expenses you can’t do without while wants are the discretionary expenses that you can cut off if necessary. Sometimes, however, the line between needs and wants can be a little blurry. To know if an expense is either a need or a want, ask yourself whether it is necessary for your day to day life or not.

It’s important to differentiate between needs and wants because they both affect your spending behaviour. If you identify certain expenses as “wants”, it’s easier to get rid of them from your budget, especially when you’re having financial constraints.

Step 4: Automate your budget.

There are a lot of budgeting apps that can help you plan and track your spending and save more efficiently. These include Mint, You Need a Budget, Wally and Acorns. These applications not only simplify the budgeting process for you, they also help you manage money, stick to a budget and even handle investment decisions.

Automation also directs your money from the bank to your bills payments, savings and investment. This way, you’ll have a lower chance of spending your income on the pricey spur of the moment expenses, thus helping you be in control of your budget.

You can automate your finances from the time you receive your salary by having your company directly depositing your paycheck into your checking and savings account. Then, you can automate your checking account so that it directly deposits money for your retirement fund, loan repayment, as well as for your credit cards and miscellaneous bills.

Step 5: Adjust your budget accordingly.

As you go along with your budgeting strategy, you will have a better understanding of your spending habits and priorities. For instance, after three months of doing the envelope method, you’ve come to a realisation that you’re spending lots of money on cigarettes while always running short on food. However, you’re not ready to give up cigarette smoking yet. As a result, you adjust by increasing your budget allocation for food but decreasing your budget for sports and entertainment.

Step 6: Make lifestyle adjustments as necessary.

If you don’t want to make budget adjustments on your daily expenses, you can cope up with the budgeting stress by modifying your lifestyle. You may have to reduce the number of cigarettes you puff in one day or quit your vice altogether. The changes in your lifestyle, especially in activities that largely involve money, can create a substantial impact on your budget.

Step 7: Give yourself time to adjust.

No budget plan is perfect. It evolves constantly according to the changes in your income, lifestyle and financial goals. If you have not followed a budgeting strategy before, give yourself the time to adjust. If you’re starting your budgeting plan with debt repayment, you may need to focus on paying off your debt before allocating the money to other expenses.

Also, do not get discouraged if something comes up and messes your carefully laid out budget plan. An accident, for instance, can force you to allot money for hospitalization. See if you can still work around your budget despite the additional expenses, made a few budget adjustments or modify your lifestyle. When all else fails, do not hesitate to ask for help.

Step 8: Seek help if needed.

If an unforeseen circumstance wreaks havoc on your budget plan, like a natural calamity or a business failure, you may need professional help to sort things out. A personal budgeting service, for instance, can guide you back on the right track.

If a budget plan can’t resolve your financial stress or if you need money to cover certain expenses or manage several debts, see a financial adviser for personal financial advice. You can also take out a debt consolidation loan to pay off your balances or consolidate high-interest debts like credit card bills and payday loans.

A budgeting strategy can help sort out your finances, achieve your financial goals and even can help you out of debt. However, it is only as effective as the person running it. If you cannot fix your bad habits like compulsive shopping and overspending, it won’t be of much use.

Positive Lending Solutions is a finance broker that teams up with major banks and online lenders in Australia to find the right loan for your lifestyle needs. To apply for a loan of inquiring about financing, call 1300 722 210 or fill our Loan Pre-Approval.

See also:

Why Tracking Your Expenses Is Important

How to Calculate the Finance Charges on a Car Loan

Business Funding: Should You Get a Loan or Borrow from Family and Friends?

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