Budgeting is a major step towards getting your financial affairs in shape. The idea is to manage your finances so that you are spending less than what you are earning, therefore saving more. Controlling your budget can help fund your short and long-term financial goals, giving you more peace of mind and freedom.
Not everyone’s budget will be the same. Based on your income and spending, you can create one that is right for you.
The first step is to have savings goals; make both short-term and long-term goals. A short-term goal could be saving for an emergency fund or a trip. Long-term goals could be saving for retirement or any other life events in your future. Having goals will help keep you motivated.
Estimate how much you would need to save monthly in order to meet your goals. To do this, you have to know your income and spending habits. Write down your regular monthly income; if you have side jobs which don’t pay on a regular basis, keep them out for now.
Track your expenses for an entire month. You can use mobile apps, Microsoft Excel or good old pen and paper for this. Don’t exclude anything: even an unexpected, one-off expense. Make it a habit of writing down your spending at the end of each day. If you have difficulty keeping track, try using an online or mobile app such as Mint or TD Spend which automatically track all your spending from any of your accounts that are connected.
Group your spending into categories like home, utilities, loan payments, credit card payments, entertainment, eating out, etc. Some categories can be non-negotiable like utilities, while others like entertainment can be flexible; it will depend on your situation. Categorizing will help you assess how much you are spending in each category and will help you set limits accordingly.
At the end of the month, subtract your spending from what you have earned. The amount left goes into your savings.
Review your spending: what categories did you spend most in? Were there unexpected expenses? How much went into savings? Do you think that you can reduce spending in some categories?
Based on your one-month experiment, decide how much you can or want to spend in each category. Be realistic while doing this and be ready to make some compromises. If you are not meeting your savings goals, you will need to either cut spending in some areas or increase your income.
Budgeting is a lot like dieting. Just like having cheat days on a diet, make room in your budget to treat yourself occasionally. This will prevent you from feeling deprived.
This will help you see how much of your goal you have achieved. Even if you sometimes falter, keeping your goals in mind will help you get back on track.
FlexFi Inc. is not a financial advisory firm.
This article is for informational purposes only and is not a substitute for individualized professional advice.
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