There are lots of reasons why expert and even most of the common people believe that budgeting is the primary tool that can help anyone to take control of their personal finances. In simple words, the budget will help you to know the inflow as well as outflow of your money. Budget is very important in everyone’s life and should not be viewed as a simple piece of paper or a spreadsheet. It is actually a plan that will help you to spend your money judiciously.
However, it entirely depends on your choices as to whether you will prepare a monthly or an annual budget but that fact that it should be accurate, honest and should be followed conscientiously holds good for both. This will eventually help you to make well educated and affordable financial decisions and that too well ahead of time.
There is a lot of importance and usefulness of proper budgeting. It can be enumerated as follows:
- Budgeting will make your life easier and help you to cover all your necessary expenses all through the year.
- It will also consistently help you to make your finance work in a better way and help you to build wealth over time.
- When you know how and where to spend your money, you will be able to make sure that every penny is being used just the way it should be.
- You will be able to track your income and spending so that you can analyze and determine whether or not there is a balance between the two.
- You will know whether the spending is matching your priorities as well. It is often found that when people start budgeting they are often amazed to see how much money they spend every month on things that are not so important or indispensable to them.
In short, budgeting will allow you to monitor your progress towards your goals to attain financial freedom and at the same time help you to stick to your financial plan. You will not need to take on additional money in forms of loans and look for different sources that [provides money on easy terms and visit sites such as https://www.libertylending.com/or others.
Setting up your budget
Ideally, setting up a budget may seem to be a very straightforward process. All you need to have is to have all your bills entered in a single list. This list will help you to see your expected income and the total amount of money that you will need to spend each month.
If you are a beginner to follow this simple process for budgeting:
- Start budgeting by looking at the expenses of the past three months if you have never budgeted before.
- Use your bank statements to break your expenses into different categories.
- You may also use any budgeting software if you have and know to use to upload your statements and use it to sort them.
- List your income for the month including your paychecks received income from other sources such as investments and child support.
- List your expenses in order of importance starting with the most important ones to the least. This will make it easier for you to make cuts in your expenses if needed.
- Make sure that all necessities such as housing, food, utilities, transportation, debt payments, and savings are included before you list the luxury items such as clothing, entertainment, cable, eating out and gym memberships.
- Compare the two numbers of your expenses and income and if expenses are less than your income put away the additional money for debts payments, creating emergency funds or any other financial goals
- If you have expenses equal to or more than your income you will either have to cut down your expenses or find ways to increase your income. The primary objective is to put your income amount over and above your expenses amount at any cost.
Once you are done, you should start following it from day one. Track your spending and stop when you reach the limit in your budget in that specific category. If you have to spend more in a specific category than your budget, transfer the deficit money from another category to balance it. Therefore, you will need to check your spending every day to know how much is left.
Repeat the same process the next month, and next month and so on. Finally, planning and budgeting will be easy.
Different budget types
There are different types of budgeting in which different strategies are followed to make overall budgeting easier. Since the needs and wants of every person are unique, there is no ‘one size fits all’ policy. These are the different types of personal budgeting:
- Envelope Budget: This is when you assign money to each spending category. You take out cash every month and allocate money for each expense category in different envelopes labeled. You stop spending when you run out of money in that specific category. This type of budgeting is good for people who are not very efficient in tracking their expenses.
- 50/30/20 Budget: This is the ratio of spending on different categories. This budget is more helpful in reaching your financial goals with a better focus. 50% money after tax should go for your basic needs or fixed expenses, 30% of your income on your wants or variable expenses and 20% must be spent on debt repayment and savings.
- Zero Dollar Budget: This budget will help if you want to spend every dollar you earn every month leaving very little room for savings. This type of budget requires good control of your spending and regular monitoring of your budget.
- 5-Category Budget: This includes five basic categories and determining the percentage you want to spend on each. You can spend up to 35% of your income on housing, 15% on transportation, 25% on other living expenses, 10% for savings, and 15% for debt payoff.
A specific strategy may work better for you than another and therefore you must choose the right type of budget according to your personal situation.
Kelly Wilson is an experienced and skilled Business Consultant and Financial advisor in the USA. She helps clients both personal and professional in long-term wealth building plans. During her spare time, she loves to write on Business, Finance, Marketing, Social Media. She loves to share her knowledge and Experts tips with her readers.