How Personal Budgeting Can Help You Reach Financial Freedom

Budgeting is an exceedingly important financial strategy that evaluates how much you make, measures how much you spend, and assists you in spending less than what you earn or bringing to the table. Financial planning on its own takes a look at your present financial state and builds an extensive portfolio by predicting future cash flows, asset values, and withdrawal plans based on information currently available.

We at Financial Education believe that proper financial planning can help determine your short and long-term financial goals and help you create a balanced plan to achieve them. Having a monthly budget plan can help balance your income and expenses and assist you in achieving your long-term financial goals. When creating a personal budget, arranging your monthly expenses into different categories can help you get a clearer view of your spending habits and sort them to reach your goals.

Owning a personal budget that you can review regularly is a crucial part of financial literacy, and also the best way to prevent you from overspending. If you are regularly taking on debt or over-drafting your accounts, a good budget can help you come out of that situation.

How to Create a Personal Budget?

Creating a budget is quite simple. A budget basically is an organized and sorted arrangement of data that shows how and where your income is being spent and provides you with a holistic view of your finances. So, if you would like to create a personal budget to help you manage your finances, here are some simple steps that you can follow –

1. Determine Your Monthly Expected Income

The first step to take in creating a budget is to be aware of the amount of money you make every month. If you are a salaried job earner, it is the amount you take home per paycheck that you’ll get to see on your paystub. If you are the type that gets paid twice every month, which happens to be on the 15th and 30th, you multiply your paycheck amount by two.

But if you get paid biweekly, you will have to multiply your paycheck amount by 26 and divide it by 12. If you are more than a salaried job earner, have an unsteady income, or you’re self-employed, the process of knowing your net income which is different from your gross income is only a little different. So, the first step is to figure out how much money you make every month.

2. Make a List of All Your Expenses

Your fixed expenses are your expenses that remain unchanged from month to month. They include your rent, credit card debt payments, internet, and phone bills, car payments, repayment of student loans, and insurance. Write them down on a piece of paper. You can fill out a budget worksheet, or make a budget spreadsheet. There are plenty of options out there and you can select the one that you prefer.

3. Sum Up Your Fixed Expenses

You can munch out the numbers to know how much you spend on your fixed expenses every month. Since the numbers remain constant from month to month, you can use them as a foundation to create your monthly budget. To determine how much you have left of variable expenses, you can subtract your total spending on your fixed expenses from your net income. This will give you a good idea of how much money you have to spend every month on your fixed expenses.

4. Make a List of All Your Variable Expenses

Your variable expenses are expenses that are not constant and can change from month to month. They include your groceries, shopping bills, restaurant visits, miscellaneous purchases, gifts, and more. To estimate your variable expenses, check the receipts and the online banking and credit card statements. Make a list of every single thing you spent your money on the previous month that wasn’t a constant expense. Even though there’ll be changes on these numbers every single month, starting from your last month’s purchases, it will give you a solid estimate of your spending habits.

5. Sum Up Your Variable Expenses

Sum up all of your variable expenses. The total number you get from it should be added with the number of your total spending on fixed expenses. Now take a look at the number it gave you. Is it more or less than your total net income? If it is less, then you’re making progress on your spending habits but if it is more, then you’re living above your means.

6. Make a Breakdown of Your Monthly Expenses in Categories

Now, as you already have a list of your fixed and variable expenses, you can put them in categories. It can go a long way for you if you use broad categories, like “food,” along with specific subcategories, like “restaurants,” and “groceries,” to learn more about your specific spending habits. This will help with better allocation of finances and present a clearer picture for you.

7. Make an Evaluation of Your Spending Habits

The next step is to make a sum of your total spending per category. Divide your total spending per category by your net income and multiply by 100%, to ascertain the percentage of the income you spent on each category. Seeing the percentages can give you a clearer view and make you understand how much of your money is going where. This will help you understand where your money is being spent the most and how you can control excessive spending.

8. Check-in with Your Financial Goal and Adjust

You now have your spending laid out in front of you, it’s now time to check in with your financial goals and make the necessary changes to your budget. If you spend more than you make, spot the areas where you can cut back. Variable expenses are easier to cut back than fixed expenses.

More so, if you are enormously overspending on fixed expenses, it can be hard to make up for that. For example, if it is your rent that is taking much of your money, it is better to consider a less expensive housing option. However, If you have any balance left at the end of the month, that’s a positive sign that your finances are being managed properly. 

This means that you can assign more money towards savings. Similarly, you can continue like that with the next category’s total by making a new goal for the next month’s spending. This will be your guide for every “monthly budget” spending. Doing so will help you allocate your income in the best way possible and also help in identifying areas that you overspend and can cut back on.

3 Budgeting Strategies That Can Help You Save Money

So, you’ve calculated your net income and your average monthly spending, but are not sure of how to turn that data into an actual budget? Well, we’ve got you covered! Here are the three most popular strategies that you can use:

1. Try the 50/30/20 rule as a Simple Budgeting Framework :

The 50/30/20 budget rule is one of the most popular budgeting methods. This plan involves breaking down your spending into three broad categories: essentials, nonessentials, and savings.

  • The 50/30/20 budget rule suggests that you spend up to 50% of your income on your needs as that is essential.
  • The 30% of your income should be left for your wants as that is non-essential.
  • Finally, you should commit 20% of your income to savings and debt repayments.

2. Zero-Based Budgeting

Unlike other budgets that are based on an estimate of how much you make every month, a zero-based budget uses the income you made the previous month to offset everything you need for the current month. The “zero” comes from the idea that every single dollar gets a specific role so that by the end of the month, you end up with zero dollars. 

3. The Envelope System

This system is a useful strategy for people who have difficulty sticking to a budget. When it comes to the traditional envelope system, every time you get paid, you remove cash. This cash goes in separate envelopes for each category in your budget. When the envelope runs out, that’s it. If cash in hand isn’t realistic enough for you, some apps can help translate this system for the digital world, such as “Goodbudget”.

Tips for Successful Budgeting

A budget is of no use to you lying in a drawer. Here are ways to make a budget work in your favor and not against you.

  • Set Specific Goals

    You are likely to stick to your budget if your goals are specific, rather than to “save money”. Be sure to create separate savings accounts for each financial goal to track your progress. If you’re working towards cutting back on certain categories, you have to assign yourself an exact dollar amount you are to work with.
  • Make Incremental Changes

    If you’re seeing your last month’s budget and you realize that you need to radically cut back in some areas, do not try to do them all at once. Rather, you need to reduce your spending in a gradual and consistent manner for each of the months to ease into the adjustment.
  • Figure out What’s Important to You

    A great time to review what’s important to you and to make sure that’s exactly where you’re spending your money – is during budgeting. You have to spend your money wisely in those areas, and cut back on the things you do not care about. If your values are true to your budget, it will be easier to stick to the plan.
  • Use Tools that Work for You

    By choosing a budgeting tool that works for your kind of lifestyle, you have successfully set up yourself for greater success. Whether it’s from a pen-and-paper ledger that you use in writing every day, a standard spreadsheet, or an app that helps in keeping track of your activities for you. These tools are there to assist you; if they end up frustrating you more than the budget itself, then it’s time to try a different approach.
  • Automate and Oversee

    Set up automatic payments to your savings and retirement accounts, so you don’t mistakenly spend the part of your income reserved for savings. When you automate payments, it is a great way to make sure that you don’t fall behind on important bills. Always scrutinize your automated bills and payments every month to make sure that you aren’t getting surcharged.           
  • Review your Budget

    Having a time set up for each week to examine your finances will give you room to adjust your spending throughout the month. It will also help you avoid issues of purchases you don’t remember. Treat your budget like a project and keep evaluating it regularly to ensure you reach your financial goals. Always make sure to evaluate and make necessary changes at the end of the month.

Conclusion

Budgeting is all about organizing your expenses and income while creating a well-structured plan to help you achieve your financial goals. It is a simple but effective process that teaches you better ways to gain more opportunities for you and your household. No matter the method or tool you decide to use in calculating your income and expenditures, or ascertaining how to meet your financial goals, and plan for your expenditures, a budget will provide you the design you need to make your finances fit well for your life.

We hope that this article will help you in creating a budget for yourself and take control of your financial life! If you would like to see more such interesting content on the stock market, personal finance, and entrepreneurship, then do check out Jeremy Lefebvre’s YouTube Chanel “Financial Education”.

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