ALL ABOUT A BUDGET
A budget can be defined as a written plan that outlines how one is going to spend their money each month. It shines a light on how much money they can make and where it can go so that money can be used to achieve life goals. Let us explore the working of a budget and why it is important along with some popular kinds of budgets that are used.
A budget is a financial planning tool in which you write down how much funds or money you expect to gain (i.e. income) and how you are planning to spend and use that. Businesses and individuals alike use budgets to track their cash flows and reach their desired goals.
One of the popular budgeting models is the 50/30/20 model. You can use 50% of the earned income for needs such as utilities and rents, 30% for want such as eating out and shopping and 20% for savings such as investments, emergency fund, building retirement funds etc.
WORKING OF A BUDGET
The objective of a budget is to assist you to track the spending so that you can use your money to reach the desired goals. Budgeting helps you to decide upfront how to spend the money. Everyone has different goals and priorities. Through budgeting, you are making sure your goals and priorities are being put ahead of the expenses that are not very important.
After you set up your budget, following of the three things can happen:
- You will have a surplus:
This signifies that you are spending less than you earn. You can use the extra funds to invest, save and reach your goals.
- You will strike a balance:
This means your income is equal to your expenses and you are not spending more money than what you make.
- You will have a deficit:
This signifies that you are spending more than what you earn and can possibly go into debt.
NEED OF BUDGET
A budget is the most significant part because it helps you to save for the future and pay your bills on time. It will also assist you to find ways to spend less money on things you do not value so you will have more funds to put toward your goals such as saving for a vacation, a new car, retirement etc.
Everyone can benefit from a budget no matter how small or large your income is. Without one, it is very complex and hard to know where the money is going every month.
CREATING A BUDGET
Whether for business or personal use, here is how you would go about creating a budget:
1. Add up your monthly income:
First things, you will need to figure out how much funds and money you can make each month. Use your net take home pay for this step which is the amount of funds you bring home after deductions and taxes.
Do not forget to include any other sources of income such as child support, social security, side hustles and many more.
2. Estimate your monthly Expenses:
Now it is time to calculate your spending. Dig through your old bank and credit card statements to see how much money you will spend every month. Some generic expenses to add to budget can include:
- Mortgage or rent payments
- Cell phone bill
- Health expenses
- Pet costs
- Debt repayments
3. Subtract your expenses from the income:
Once you subtract your expenses from the income, you will gain a better idea of if you are living by taking on more debt or within your means.
If your expense are higher than your income:
You are spending more than you are making. Look for ways to cut down the expenses and increase the income.
If you break even:
You are just barely living within your means. Ideally, you want some extra money left over each month to put forward for financial goals. See if there are some expenses that can be trimmed and give yourself a buffer.
If your income is more than your expenses:
You have money left to spend or save. Consider putting some of this fund towards the financial goal you set and aspire to achieve.
4. Build some financial goals into your budget
As you build your budget, incorporate some financial goals you will like to reach in the coming years or months. For example, you can create budgeting categories for such goals like:
- Down payment on a house
- Emergency fund
- New Car
- College fund
5. Make Adjustments as you go ahead:
Your life is dynamic and constantly changing, so your budget should also be adaptable. When you get a new job, add a new expense or earn a bonus, adjust it to reflect the changes.