Budgeting should be the lifestyle of anyone who wants to build a sustainable financial life. A budget is simply the plan or blueprint for how you intend to spend your earnings. So, rather than spending money randomly, one is expected to know how to budget money. Budgeting always serves as a guide to how money should be spent.
Budgeting is a life skill I never learned until my finances hit the rocks. During my first year in college, I was engaged in a remote job that brought in weekly paychecks. Thankfully, I successfully juggle both schooling and work, unlike most students.
At the end of each week, I usually received my earnings, which made me feel quite extraordinary because not every student can work and attend school simultaneously. But in as much as I was earning weekly paychecks as a college student, there was something crucial I had failed to learn – budgeting.
I never had any plan for my income. Each time I get paid, I rush to a grocery store and mart to get supplies. I kept doing this without guiding my spending habit with a proper budget.
It took a while before I realized the damage that had been done to my finances. I didn’t have any savings because I was constantly engaged in a shopping spree. Having learned my lesson and the importance of budgeting, I started budgeting my money, no matter how little it was.
Knowing how to budget your income could help you avert many financial troubles, especially when you don’t have a lucrative source of income. Fortunately, there are so many helpful budgeting tips you can rely on. This post explores the 5 easy-to-apply steps that can help you get started on budgeting money.
Importance Of Budgeting Your Money
Being able to budget your money is very crucial. You could hit some of your financial goals if you are committed to creating a budget each time you want to spend a chunk of money. You must know how to plan a budget to avoid impulse buying and any other bad spending habits that could harm your finance.
There are some benefits that make budgeting an essential way of life. As someone who clearly knows how to budget, here are some of the main advantages to it:
- Budgeting helps you maximize your income, even if it’s not much.
- You get clarity about what you should spend money on and what you shouldn’t.
- Having a budget can help save some money, even if you don’t have a fat paycheck.
- You could avoid incurring a couple of debts.
- You could avoid stacking up credit card bills.
- Budgeting gives you insight into how to manage your money.
- Budgeting enables you to attain certain financial goals.
If you take your time to understand the merits as mentioned above of knowing how to budget, you will realize how important and beneficial it can be.
Hindrances To Budgeting
Budgeting money is not as easy as it seems, and it takes an exceptional level of determination and discipline to create a budget and stick to it no matter what happens.
Moreover, a couple of key factors can potentially hinder you from budgeting money. If you don’t know have to manage these factors, budgeting becomes almost impossible to carry out.
Below are some of the hindrances people face when trying to budget money:
- Having A Very Low In-Flow Of Income
When you earn a tiny amount of money at the end of the month, it becomes too difficult to have proper planning towards your income because there’s never enough money to distribute around.
In fact, low-income earners never think of how to make a monthly budget, and they don’t draft any plan on how to spend their money.
- Having Too Many Expenses
Creating a budget automatically becomes hard work when you have too many expenses waiting to swallow up your paycheck as soon as it arrives. You become frustrated and confused, not knowing how to create a budget that can attend to all your expenses.
- Indiscipline And Laziness
Some people can’t budget their income, not because they don’t earn enough, but because they are lazy and have no discipline for managing finance. You must learn how to break free from your comfort zone if you want to create a budget and stick to it.
- Feeling Restricted
When you feel as if you are being restricted from spending your own money, it becomes tough for you to embrace the habit of budgeting. You wouldn’t want to know how to budget your money at all.
If you have ever felt restricted regarding budgeting, you must understand that budgeting your income is for your benefit. You are not budgeting because of someone else. You create a budget for your own sake, intending to have a stable financial life.
There are other factors that could prevent you from budgeting your money. Nevertheless, the factors explained above are common and very challenging.
How To Budget Your Money In 5 Easy Steps
Budgeting your money is not a complex process at all. If you can painstakingly follow the 5-step process that has been explained below, you won’t struggle to know how to budget.
1. Evaluate Your Income
Once you decide to budget your money, you must first evaluate your income. That is, examining the amount of money that comes into your obsession weekly or monthly.
You must identify how much becomes yours solely after taxes. If you can’t picture what your after-tax income looks like, you can use your bank statements or pay stubs to determine the numbers.
Once you clearly understand how much you earn, the next thing you want to examine is your monthly expenses. Examine your rent, utility bills, mortgage, insurance, groceries, and gas. If you have credit cards and car loans, you should include them as well.
Now, if your expected monthly expenses are greater than your monthly earnings, you must find a way to create an additional source of income, so you can attend to all your expenses and still have some money in your savings account.
Also, if you have a spouse or partner who shares these responsibilities with you, you must also examine their income. This helps you to split the expenses between both of you evenly.
More importantly, if you are bent on increasing the amount of money you save every month, try as much as you can to cut down on some expenses without crossing the line. For a start, you could reduce your utility costs a bit.
2. Choose A Convenient Budgeting Strategy
This next step is very crucial. This is where you create your budget, which is a feasible plan for spending your earnings each month and ultimately achieving your financial goals later on.
Whether you intend to learn how to save for a car or you just want to pay your debts, there are several types of budget strategies you can use.
Here are some budgeting strategies you could consider, with each having its own pros and cons:
- 50/30/20 Rule
This budgeting strategy has become well known for more than 20 years.
The 50/30/20 rule suggests that 50 percent of your earnings should be allocated to all your essential expenses (housing, utilities, transportation, cell phone, and whatnot), 30 percent of your earnings should be enjoyed (dining out, travels, and recreation). In comparison, the remaining 20 percent should be transferred to savings or investments.
This is an easy budgeting strategy that does not require you to account for every purchase or expenditure. However, the downside to the 50/30/20 rule is that it doesn’t work out in every scenario.
For instance, this rule can’t be feasible when only your housing expenses claim 50 percent of your income.
- Zero-Balance Or Traditional Budget
This is a budgeting strategy that suggests you spend your entire income on all your expenses (both on essentials and luxury) without leaving a single cent. This means that you should exhaust all your income each month; towards your essentials, wants, and financial goals. If you don’t know how to budget money on low income, you should try this.
The advantage of this strategy is that it compels you to account for every dollar spent to ensure you make the most of your income each month.
The drawback, however, is that this method is time-consuming, and it takes so much time and effort to track each expenditure, figuring out how much money comes in and goes out.
- Pay Yourself First Budget
This budgeting strategy suggests you start with your financial goals before attending to expenses.
So, for instance, if you want to add $300 to your mortgage and $350 into savings, it means you would subtract $650 from your monthly take-home pay and use the rest money for your monthly bills and expenses.
The good thing is that it helps you prioritize your financial goals and promotes flexible spending. The only disadvantage to the strategy is that if you allocate too much money to your financial goals, you may not have enough money to cover your remaining expenses.
- The Envelope Budget
This budgeting strategy was developed by the renowned financial guru Dave Ramsey. It requires setting aside money in an envelope for each expense or category of expenses. E.g: housing, feeding, utilities, entertainment, and whatnot.
If you run out of money in this process, it means you have overspent and need to adjust your spending. Even if you don’t know how to budget, the envelope budget strategy is a practical process that shows you how.
One advantage of this method is that it’s tangible and visible. You see the money being allocated to each expense, thereby making it easy for you to understand the budgeting process. The only downside is that it’s time-consuming.
3. Avoid Overspending
While crafting your budget, you need to ask yourself if you are overspending. You must carefully check out your expenses and identify what is necessary and what is not.
This would often require you to renegotiate your pricing, change service providers, examine the subscription-based services you use (e.g., Cable TV), try to cut off any subscription you are not actively using.
Another method of avoiding overspending is by creating a meal plan. Having a meal plan for the week will enable you to stay on track at the grocery store, preventing you from eating out frequently.
No matter how little, cutting down on your expenses could help you spare more cash for paying debts and achieving some financial goals.
4. Automate Savings And Investments
Regardless of the budgeting strategy you decide to use, always make savings a part of the plan; especially when you know little about how to budget monthly.
The best way to do this is by allowing automated deposits into your savings account every month. When your savings become automated, you have time to focus on other aspects of managing your finance.
Also, it’s highly recommended to have a high-yield savings account. This helps you earn money at a higher rate, unlike other options.
Another good thing about automating your savings is that you can consider investing any leftover income. If you are really interested in implementing this, you should consult with a certified financial planner who would advise you on choosing the best investments for your goals.
5. Track Your Progress
Creating a budget is not where it ends. It would be best to track your progress to discern when and where you need to adjust your spending. As someone who’s just getting started, you would need to track and adjust your spending habits.
The key to tracking your progress is identifying your spending trends and making sure they sync with your spending priorities.
For instance, if you are spending $45 on soft drinks every week, and you intend to purchase a $45-shoe soon, it means you would have to readjust your spending habit by forfeiting the money you spend on soft drinks for the pair of shoes you want to purchase.
Final Note On How To Budget Your Money
If you desire to make the most of your monthly take-home pay while trying to achieve your financial goals, you must have a budgeting strategy. A perfect budgeting strategy is one of the tools you need to build a financially stable life.
Moreover, in as much as there are so many tips on how to budget money for beginners, the information in this post has almost everything you need to get started. With the simple yet effective 5-step process above, you will have a clear insight into how to budget and manage your income.
Pin this for later!