Some people get intimidated thinking about creating a budget. Well! We assure you; it is not as daunting! In fact, you just need to follow certain steps to build an effective budget. However, sticking to a budget is challenging sometimes! You might be tempted to overspend, do some frivolous shopping, go for an unplanned vacation, etc., to upset your plan!
Here, we not only explain how to build a budget plan in easy steps but also suggest the best ways to stick to it.
How to Build Budget: The Step-By-Step Guide
Budget is a great way to know where your salary is going every month. It can get your finances in control and help you accomplish larger financial milestones. Here is how to build a budget for a month.
1. Set Your Goals
Before starting to make a budget, think about your short and long-term financial goals. Your short-term goals may include things like an emergency fund, paying outstanding credit, buying a car, etc. Long-term goals are retirement savings, a child’s wedding or education, etc. This will help you know how much should be necessary savings.
2. Jot Down Your Monthly Pay
Firstly, you should write your monthly salary in the budget. Ensure to use the net salary figure which excludes taxes, surcharges, provident fund amount, etc. This salary can also be understood as a take-home salary that you use to make expenses. Be careful if your salary includes a health insurance plan premium, stocks, bonds, retirement account, etc. For some employees, all these deductions already happen from the paycheck.
Also, you should consider your total salary from different sources in a budget. For example, if with a full-time job, you are doing freelancing or part-time work, then add that income too to the budget. Ensure to subtract taxes from it.
3. Write Fixed Monthly Expenses
Now that you have mentioned all your sources of income after deducting taxes, it is time to write down all the necessary or fixed monthly expenses. Though the expenses vary with household, the most common ones include accommodation rent, school fees, payment to the house help or nanny, and monthly bills like electricity, gas, water, property, etc. Include loan payments, too, such as auto loans, home loans, credit cards, etc. Consider insurance expenses, too, like health, car, travel, etc. Do not miss including internet (wifi), phone, and streaming services (Netflix, Amazon, etc.) subscriptions costs too.
4. Write Variable Monthly Expenses
Now that you have listed all your unavoidable monthly expenses, now is the time to think about other expenses that might change every month but are there! Variable expenses are grocery costs, conveyance costs like bus/car/train tickets, restaurant bills, gym or health center costs, etc. You should also consider household goods costs and travel bills. Other than these, there can be many miscellaneous expenses like cinema, apparel, gifts, etc.
The biggest difference between fixed and variable expenses is that you cannot curtail fixed monthly expenses but can lower variable ones. For example, when you have a financial crunch, you can always drop your dining expenses or not visit cinema theatres. But you cannot avoid paying your rent or health insurance premium.
Also, fixed expenses does not change unless these are utility bills like electricity and gas. So, take an average of these costs when you build a budget to have a clear number. Look how much you paid in these, like groceries for three months, and then calculate the average amount.
5. Edit the Budget
Now, you should start comparing your income and monthly expenses. If you observe that your expenses are too high compared to your take-home salary, then you should strongly consider ways to lower your expenses. Since you cannot change your fixed expenses, you should make changes or adjustments to the variable components of the budget. Re-assess how much you spend every month on eating out, reducing household goods expenses, or opting out of the streaming subscriptions you are not using.
There is another possibility leading to a brighter scenario, when your income is higher than the spending. If you can save much more, you can increase your budget and fulfill some of your additional desires. Or you can use this extra money to increase your emergency or retirement fund rather than increasing non-essential things like cinema and dining.
How to Stick to the Budget?
Follow these tips to ensure adhering to your budget:
1. Set Realistic Goals
Setting achievable goals is the first trick to success. For example, having an objective of saving 50% of your income seems unrealistic. Have a thoughtful objective that can be fulfilled.
2. Use Budgeting Tools
You may find regularly tracking your budget tedious and may finally give up. To avoid this, use budgeting tools and allow these to do all the maths and calculations.
3. Include a Partner
Discuss budgeting with a friend, spouse, or family member. This will increase your accountability and ensure success.
4. Pay with Cash
Using a credit card for making payments does not hurt much compared to cash. Try making cash purchases and see if you are saving money, as determined.
5. Automate
You can automate your account transfers, like some part of your income transfer to a savings account. This will ensure uninterrupted savings and allow you to stick to the budget.
6. Emotion Control
Control your emotions, and do not get tempted to purchase impulsively. This may seem hard in the beginning, but gradually you can work on it and make it doable.
Wrapping Up
To know how to build a budget and stick to it is essential for financial wellness. Make an effective budget by including your income and all expenditures, and ensure to track the same regularly. You can also use a budgeting app to help you. Adhere to the budget by automating savings, sharing the budget with someone trustworthy, using budgeting tools, etc. Set your foot right; you will see a more disciplined you soon!
FAQs
1. How do I create a budget?
Ans. Set your short and long-term goals, including your income and expenses (fixed and variable), and finally, adjust the budget.
2. How to stick to the budget I created?
Ans. To ensure following your budget, use budgeting tools, set auto-transfer, increase accountability by involving another person, control your emotions, etc.
3. What does it mean to create a realistic budget?
Ans. If you know in the beginning that the goal you are setting is bound to fail, then what is the use? If you want to adhere to the budget, push yourself, but be realistic. Skip expenses that can be avoided and not your fixed ones.
4. How much should I save?
Ans. The amount of savings will depend on how much you bring home every month and how much you spend. Some people are committed to saving 20% of their take-home salary; some may save more.