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Budgeting for Beginners: How to Build a Budget
Ahead, steps to managing your money through a personal budget
Looking at numbers alone can be overwhelming; what more when it comes to creating a personal budget? As daunting as the #adulting duty, learning how to work out a budget is essential to having a better quality of life. Keeping track of your earnings and expenses through one is helpful, as it allows you to assess your essential and inessential expenses and even identify unhealthy spending habits. Wouldn’t it be nice, in this economy, to minimize the risk of overspending?
Keeping a budget, in addition, can reduce overall money-related stress because you get to plan ahead and concurrently build an emergency fund, which works to keep you ready and grounded when unexpected financial issues arise.
All that said, it’s ideal to keep records of your financial statements, but if you cannot track them anymore, you can start with whatever information is available to you. Once you’re set, learn how to manage your personal finances better with the budgeting guide ahead:
#1: Create a summary of all the sources of your monthly income.
Review and make a list of all your income sources in a month. If you have a regular salary, record your net pay (otherwise known as your take-home pay), which is the total amount that you receive after your taxes and government mandatories are deducted by your employer.
If you have side jobs that also provide you with regular income, include these as well. Regular payments for disability, social security, alimony, or child support should be included, too.
If you happen to be working as a freelancer, where you are likely not getting the same pay monthly, refer to your record of previous projects and compute your average monthly income. Use this as a basis.
#2: Make a list of your monthly expenses and then categorize them.
Identifying your expenses and other financial obligations is important so you can keep track of where your hard-earned money goes. Record all your expenses, big and small; jot down everything if you can. For this, you can use an old-school planner or download an expense-tracking app (whichever is more convenient for you). Taking on this step, reviewing your bank and credit card statements may be helpful so you can countercheck what you have spent your money on.
Once you have your list of expenses, it’s time to categorize them. Monthly expenses can be filtered according to fixed expenses and variable expenses.
Fixed expenses are regular monthly expenses such as rent, utility bills, and insurance. Housing, car, and student loan payments are included in this category as well.
Variable expenses are costs that change from month to month. Essential needs (food, groceries, gas, transportation fees) and wants (dining out, leisure travel, and entertainment) are some things that fall into this category. You should be extra mindful of these variable expenses as people tend to be unaware of how much they spend on these items until they see the accumulated total.
#3: Subtract your total monthly expenses from your total monthly income.
After making your tally, subtract your expenses from your income. If you have money left after this calculation, you have what is called a budget surplus. With this surplus, you can decide whether you want to allocate more money to your emergency fund, pay off debts in advance, or continue saving up for a major investment buy in the future.
If your expenses exceeded your income, however, what you have is called a budget deficit. Take the time to review your expenses and find out where you can cut down and make compromises so you can save money. Evaluate which things are actually needed and which are just wants (read: indulgences), so you can reduce costs and minimize unnecessary expenses.
#4: Choose a budgeting method that works best for you.
Learning how to manage your personal budget will lead you not only to develop the habit of saving but to gain an increased awareness of your spending behavior. Not all budgets, however, are the same. There are different methods that take into consideration lifestyle, mindset, note-taking style, and more. Explore and try out various methods and see which one works best for you.
An example? The popular 50/30/20, a type of percentage-based budgeting. In this method, you can allocate 50% of your income to necessities, 30% to your wants, and 20% to savings and debt repayment. You can customize the percentages to suit your preferences, too. Other people set aside about 3% to 10% of their net income to support charities. Those who practice this method long-term can manage their debts and expenses while allowing themselves to indulge occasionally.
With cash envelope budgeting, you assign specific budget categories to individual envelopes and fill them with the amount allotted for that category. Once you spend all the cash in an envelope, the rule is you cannot pay for anything else in that category for the month. This method teaches you to be disciplined and committed to sticking to the budget assigned for every expense category that you set up.
If you are worried about overspending, you can also phone a friend as an accountability partner—someone who is non-judgmental and can offer you encouragement as you follow your budget plan. You can ask this person to help you with your weekly budget check-ins to see if you are on track with your financial goals.
#5: Set goals that you want to achieve and plan wisely.
Reflect on your current lifestyle along with the goals that you want for yourself. Do you want to buy your own house, start an investment account, or add more money to your emergency fund? When you identify your goals, you can review and adjust your budgeting plans as needed.
#6: Be kind to yourself.
Sometimes, sticking to a budget might feel restrictive. Make sure you allot money for rewarding yourself within reason, too. Why not motivate yourself by making a vision board of the things that you want to achieve? Here, you can put photos of your target travel destination or dream interior design references for the apartment that you’re saving for. This will help you become more mindful when making purchasing decisions, so you can prioritize things that are most important to you. If you want to achieve your dreams, after all, you need to take the necessary actions to manifest your intentions.
Up next: 5 Money Management Podcasts That Make the Road to Financial Independence Less Intimidating