Embarking on the journey to create your first budget can be a daunting and nerve-wracking experience. The key to success lies in knowing where to begin, understanding the starting point, and making breakthrough habits. But fear not! In this article, we will guide you through budget creation with a focus on avoiding mistakes, navigating the approval process, and effectively locking and monitoring your budget.
Chances are good that at least one of your resolutions centers around improving your finances in 2024, like building an emergency fund. One of the best ways to do that is by creating a budget.
The word “budget” can bring up images of spreadsheets and formulas that make you want to pull your hair out. But budgeting is just a way to ensure your money is working for you instead of the other way around.
How to create a budget
Meeting every rand or dollar with a need of yours—whether buying groceries, paying down credit card debt, or saving for your next vacation—can help you feel empowered and create momentum toward meeting your financial goals and ensuring your future looks bright.
Make a calculation of your earnings.
Start creating your budget by adding all the income sources you consistently have every month. Add up your take-home pay from each paycheck and include any additional income you may reliably receive from things like a side gig, freelance work, Social Security, alimony or investment income.
Your paycheck is probably consistent if you’re salaried and have a traditional work-to-home schedule, making budgeting much more straightforward. If you’re hourly or self-employed, you’ll likely need to take an average of your monthly income to help you budget with an irregular income. Be careful to keep your expenses on the low side to help with any months that are tight.
If you do freelance work, or if taxes aren’t normally withheld from your paycheck, be sure to deduct federal and state taxes and other business expenses before using that income in your budget.
Track your spending
Once you know how much is coming in, it’s time to look at what’s going out. Start by tracking everything you spend for an entire month, whether you pay with cash or a debit or credit card, and include any monthly subscriptions or automatic withdrawals in your totals.
You may need to track your spending for longer than a month if you have significant differences in your monthly expenses or know that you’ll have some months with more expenses later in the year.
Add up all your fixed costs, like rent or mortgage, utilities, cellphones, prescriptions, insurance, car or student loan payments, taxes, basic groceries, and child care. This amount gives you an idea of the minimum you need each month, without anything fancy.
Then, add up your more variable expenses, like credit card payments, gas, entertainment, eating out, subscription services, or extras at the grocery store.
Budget Planning Apps
Keeping tabs on your financial outlays may be accomplished in a number of different ways. Use a notes app on your phone, an old-fashioned pen and paper, or review your bank and credit card statements each month and put the charges into a spreadsheet for easy math.
Some people may come to the conclusion that using budgeting software or an app like that will work better for their circumstances and help them keep track of their spending.
Tracking your expenditures may be accomplished with a wide variety of budgeting tools, many of which are offered at no cost or at a very low cost. Experiment until you find the best method for you and your family. The most important thing is to consistently track your expenses to have an accurate and honest view of your finances.
Develop a plan of action.
Once you have a solid view of your monthly expenses, use a budgeting framework to help you make sure you’re making the most of your money.
This is popular and simple to use the 50-30-20 framework. The idea is to spend 50% of your after-tax income on necessities, 30% on your wants, and 20% on debt repayment and savings. With this method, every rand or dollar has a job, and there isn’t anything left over.
The budget you create may look like this:
Needs: 50% of your after-tax income
- Rent or mortgage payment
- Car payment
- Child care
- Utilities
- Supermarket goods
- Cell phone
- Insurance
Wants: 30% of your after-tax income
- Entertainment
- Eating out
- Trips or vacations (including any money set aside specifically for use on trips), etc.
Savings and Debt: 20% of your after-tax income
- Credit card payments
- Funds for unforeseen circumstances
- Saving for your child’s education
Determine your priorities when creating a budget
It would be ideal if our expenditures were in line with our financial plan and we had the funds to carry out all of the things that we have set out to do. However, that is rarely the case, and you may have to adjust based on your priorities.
For example, perhaps you want to pay off debt and start an emergency fund simultaneously. Instead of doing one or the other, consider scaling back the amount you put into each goal until both fit into your budget. You’ll pay back your debt more slowly using this method, but you’ll also have built some savings to help cover emergencies and hopefully avoid adding to your debt balance.
You may be tempted to cut out your wants entirely and put any extra money toward debt payoff or savings. While that may work for a month or two, everyone needs a little room for fun in their lives.
You get to decide what’s essential in your life. You may decide that paying extra for organic food or a monthly massage is worth it, and you’re willing to reduce your spending elsewhere to accommodate it.
Review and adjust
After you’ve categorized your expenses, see if anything needs to change. If the numbers don’t add up when you use the 50/30/20 framework, you may need to change your expenditures in order to bring them into alignment.
If you can’t get the numbers to work and need to reduce your costs, the “wants” section is likely the easiest place to start. Reviewing your subscription services, gym memberships or concert budgets can help you find room in your budget for necessities or help you better focus on priorities.
If further cuts are needed, look at your “needs” section. See if you can create space in your budget by negotiating a better rate with a utility or insurance company. Or see if something you consider a need is actually a want and can be reduced.
You shouldn’t be scared to keep trying different approaches until you find one that is successful for you. Creating a budget takes trial and error.
Stay consistent
Block out time in your calendar and develop a routine of budget check-ins. It’ll help you stay on track and make needed changes. Remember that establishing your budget is only part of the battle. The real work is consistently reviewing and adjusting your system and recommitting to your goals, even when life gets in the way.
The bottom line of creating a budget
Budgeting can sound like a huge, intimidating project. It doesn’t have to be. Creating a budget can give you a better idea of where your money is going and how it can best serve your goals and future.
After you finish creating a budget, the next step is to stick to it. You can hold yourself accountable in a variety of ways. For starters, you can set reminders with your credit card and bank accounts when you reach a preset spending amount. You should also try tracking all of your expenses into your spreadsheet or budgeting app right after you make a purchase. And if you share expenses with someone else, make sure you’re both on the same page with the budget and keep each other on track
Conclusion!
Strategy is essential for first-time budgeting to achieve sustainable growth. Start by examining financial objectives and critical costs. Setting realistic goals that match your income is key. Use apps and tools to simplify budgeting and obtain real-time financial data. To reduce stress and free up funds for investments, discharge debt first. Diversify revenue using side gigs or passive income. Save for emergencies to protect your finances. As circumstances change, assess and revise your budget to develop adaptations. Continuously develop financial literacy to make educated judgments. These concepts lay the groundwork for long-term financial success and a healthy, resilient lifestyle.