Budgeting is the most efficient financial tool to help keep our money on the right track. However, we fail miserably at creating a budget. More so, even if we succeed in drafting a budget, we fail at sticking to it. But if you are serious about your finances and you want to streamline them, then a budget is your holy grail. Learn about the basics and how to stick to a budget with us in this blog.
A lot of people have a preconceived notion that budget is for people who struggle with their finances. Well, this is not true. It’s the other way round, as a budget is what keeps your finances together. People who do not have a budget often fail to make their money work. You may find the job of creating and sticking to a budget tedious. But ever imagined the benefits that you can enjoy if you do so?
There are a lot of ways to create a monthly budget and of course, the internet is a steady helper as you will get various resources to guide you. In this blog, we have collated all the important elements of budgeting so that you do not have to hop around to get the right information.
In this blog, we will discuss:
- What is a monthly budget?
- 5 reasons to create a budget
- 5 steps to create a monthly budget
- Which budgeting method works?
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What is a monthly budget?
- Simply put, a monthly budget is a money tracker that keeps a record of your monthly income and outgoings. You can say a budget is an estimation of your expenses against your earnings – which is re-evaluated when the situation arises.
- Do not confuse a monthly budget with a financial plan. A budget is an element of a financial plan.
5 reasons to create a budget
Budgeting is crucial as it allows you to manage your spending, track where your money goes and helps save more money. Budgeting will help you make smart financial decisions, plan for crises, get out of debt, and remain focused on your long-term financial goals.
Here are 5 reasons to budget your money that may help you understand why budgeting is an essential component of your financial health:
1. Controls your spending
- Be honest when it comes to your money. We all know deep down that without a budget we don’t feel the need to restrict ourselves from spending unnecessarily. A budget will control your temptation to overspend. Most of the time we go beyond our limits and pay for things using our credit cards. And when it comes to repaying the credit card debt, we struggle to pay it off.
- If you create a monthly budget and stick to it religiously, then you will never find yourself in such unpleasant situations. Because you will know how much you can afford to spend in a month. Crunching numbers is not a fun activity, but sticking to it will help you take firm steps for achieving financial independence.
2. Keeps you organised
- Your financial life is likely to get disturbed if you do not budget. Having a budget ensure that things like debts, unpaid monthly bills, and other expenses do not slip through the cracks. To get your financial life organised, you will need to plan for it beforehand. And that’s how a budget can prove to be helpful.
- If you have a monthly budget, you will find it easier to determine how much you can spend in each category. So if you want to leave a large amount of your income available for recreational purposes, you shouldn’t feel guilty about it as long as you’re still investing and fulfilling your other needs.
3. Prepares you for unexpected expenses
- Life can put you in a difficult situation. You need to be financially prepared so that you can easily manage the unforeseen expenses. Rather than making use of your savings, it is better if you prepare a cushion to minimise the financial blow.
- Therefore, if you make some room for unexpected expenses in your budget, you may not face any financial difficulty.
4. Helps you save money
- It is often considered that those who don’t have a monthly budget prefer to invest less money than people who do. That’s because when your budget, you allocate your money for judicial use. You can set up automatic transfers into a savings or investment account.
- Most of us find it difficult to understand how to efficiently make use of our money. But if you set up an automatic transfer, it will be easier for you to stay on the right track. It will pave the way for you to build wealth and you can achieve financial freedom early.
5. Expedites getting rid of debts
- You may find it hard to digest, but we often fall behind our payments due to lack of a budget. Without a proper budget, we borrow more than we can afford and then we start struggling with the repayments. Gradually, we keep accumulating debts and it comes to a point where managing the mountain of debts become simply impossible.
- This is a financial nightmare. Take small steps that will keep you away from accumulating debts. Or if you are looking for ways to get rid of debt fast, start with budgeting.
- Learn more on how you can pay off your debt quickly.
5 steps to create a monthly budget
There is no hard and fast rule for creating a budget. Customisation and personalization are essential when drafting a budget. To make it easier for you, here are 5 easy steps to prepare a monthly budget:
1. Find out the amount that you can budget for
- If you have set up automatic deductions for insurance, savings, tax, then you should get a clear picture of what exactly are you earning every month. Unless and until you have an estimation of the real amount, it will be difficult to plan for your finances. Subtract everything from your salary that gets deducted automatically.
2. Choose a budgeting system
- There are a lot of budgeting systems that you can choose from. However, understand that not every system is meant for your salary and expenses. Be careful when choosing a budgeting system as it may a significant impact on the way you handle your money. If you think that you need to make some changes to the budgeting system according to your financial position, don’t hesitate to do it.
- Learn more about 5 effective budgeting system in detail.
3. Track your progress
- Most of us hate to track progress. And this is where we need to pay attention. If we don’t know whether we are on the right track or not, how will we be able to manage our finances? In short, one of the important reasons you can keep track of your expenditures is to detect and reduce excessive spending trends in your financial life. Regularly monitoring your spending will help you manage your money and foster healthier financial practices, such as saving and investing.
4. Revisit your budget
- Your expenses, earnings and goals will change over time. Hence, you should change the budget accordingly. Revisit your priorities, and your schedule, to help you keep on track every three months. It will also help you analyse where you might be able to save on a wider scale.
5. Stick to your budget
- Everything will fail if you do not stick to your budget. Since budgeting helps you to set up a spending schedule for your finances, it means that you still have enough funds for the things you need and things that are valuable to you. The budget or savings strategy will either keep you out of debt or help you get out of debt if you’re already in debt. And if you do not put in efforts to stick to the plan that you have made, your budget will fail to impact your finances.
Which budgeting method works well?
- Budgeting systems are designed to help you grasp and analyse your commitment to finance. Although they all have a common purpose, they also use distinct strategies to get you there. There are a variety of budgeting techniques to help you achieve your financial goals. However, if you think that none of them suits your purpose, you can always draw one for yourself.
- While some of the experts say that you can manage your finances without creating a budget. Rather than following predefined instructions, if you stick to your goals, it may deliver the expected results. The key to a successful financial life is to stay within your means and to understand your financial circumstances before spending money.
