Budgeting is important for having clear financial situation. Create a simple budget and system to follow it, if you do not have one already.
Why is budgeting important?
Budgeting is something many people put off, because it seems so difficult. But it is not, really. It can be simple, and it helps you get your finances straight. A budget is simply a plan, a tool for figuring out where your money should go instead of it just slipping through your fingers on a regular basis.
You do not need to stick religiously to a budget for the rest of your life, but if your finances are not as good as they should be, use this to help get yourself in shape. Once you are there, you can put things on autopilot and not really think about it much.
How to start budgeting?
We are going to use three simple terms: Income (all the money that you earn), Expenses (all the money that you spend) and Savings (all the money that is not being spent).
1. Set up a simple Excel spreadsheet, or just use a piece of paper and a pen.
2. Income. At the top, start listing all your income sources as monthly amounts, for examples, salary from your full-time job, wages from your part-time jobs, tips, interest from bank deposits, commissions, cash back, rental income, dividends from stocks, etc. You can use the spreadsheet’s ‘SUM’ feature to add up the totals in the column. If you want to be more detailed, you can break down your income into Active Income (income earned from performing labor) and Passive Income (income that requires minimal labor to earn and maintain).
3. Expenses. After you finish with your income, move to listing all your expenses. List your Fixed Costs that are regular monthly expenses (monthly bills) such as rent or mortgage payments, auto payment, other consumer and credit card debt payments, utilities, cable, Internet fees, etc. Then, list all Variable Costs, expenses that change every month, such as groceries, gas, eating out, hobbies, etc. Later you should add Irregular Costs, stuff that comes up once in a while (less than once a month) such as auto and house maintenance, clothing, health emergency, insurance, etc. We will not get into that now as we want to keep budgeting simple. You will want to add the irregular expenses later. Put down the amounts for each expense as monthly amounts. Be sure to put enough for things like gas and groceries, as you do not want to be short. Be sure to also include your minimum debt payments.
4. Savings. There. You have got a temporary spending plan. Now, if the expenses are greater than the income, you will need to adjust until the expenses are equal to or less than the income. Otherwise, you will have debt, or no savings.
When Income > Expenses, it means you have Savings
When Income = Expenses, it means you have No Savings (!)
When Income < Expenses, it means you are in Debt (!!!)
This is it — simple and clear budgeting that will help you to better manage your money. No matter who you are, no matter what job you do, no matter where you live — do budgeting!
BUDGETING TIPS:
- Income should be streamed into your checking account automatically. Most people get their income electronically these days I think. You can purposely set up electronic payments when are you being sent checks or given cash.
- Set up bill payments or any other debt payments, so that they are automatically taken from your checking account. If it is not automatic, you might forget about it. Set a calendar reminder to check on how things are going each month.
- Simplify: see what ‘mandatory’ payments you can eliminate. This might take time, but many things are optional. For example, you can eliminate cable TV, magazine subscriptions, a car payment (going from two cars to one), and more.
- See what discretionary spending you can eliminate while you are trying to reduce debt such as expensive coffee, eating out a lot, buying magazines or comics, etc. If you do not know what to do, check how I saved USD$30,000 in just one year.
- If you have difficulty not spending your grocery and gas money so that they can last for the whole month, keep the remaining amounts as a backup for next months, or start building the Emergency Fund. At some point in the future, you may need to spend more on gas or groceries, or keep it as ‘fun money’. Here are 7 short-term reasons why people save money.
