The budget is considered one of the most important tools that should be in your financial planning toolkit. Without a budget, you may risk overspending. It can be harder to achieve important financial goals, like saving for an emergency fund or buying a home, when you don’t have a budget to guide your spending.
1. Detailed Spending Categories
When creating your budget, focus on including expense categories that reflect where your money is going. Tracking your spending using a budgeting app is a good way to understand your monthly expenses.
2. Sufficient Number of Spending Categories
In addition to having detailed spending categories, your budget should also have the right number of spending categories. When you break broader expense categories into smaller parts, you can get a clearer picture of where your money is going. This is helpful for understanding your spending patterns, and it can also assist in identifying areas where you can cut expenses. Just make sure not to get lost in the details.
3. Accurate Income Projections
Spending is half of your budget; income is the other half. Accuracy is crucial, not only for expenses but also for your income. You should calculate the amount of money you will have available to spend, not just the amount of money you earn or think you will earn. Don’t forget to deduct taxes and other deductions (such as contributions to your employer’s 401(k) plan). If you have irregular income, you may consider basing your monthly budget on the average you earn each month.
4. Categories for Irregular Expenses
When creating a budget, it’s easy to drift into monthly thinking, but don’t forget to include those expenses that may occur once a quarter, twice a year, or even once a year. For example, you may pay car insurance fees every six months while your homeowners association fee is due annually. To ensure you are accurately accounting for those expenses, turn the number into annual, then divide it by 12. Build that amount into your monthly budget and keep it in a separate account so that you can pay those expenses when they come due.
5. A Savings Item
A budget cannot be without including savings. You should treat your budget’s savings as an expense, not just what happens to the excess or surplus cash if any. By treating savings as an expense, you ensure that you are contributing money where it is most needed. For example, you could have a line item for general savings as well as a category for your emergency fund or savings for a down payment on a home.
6. Tracking Cash Purchases
You don’t need to track every dollar you spend precisely. However, you should try to get a good handle on cash spending. Cash spending can become the largest leak in most budgets. Cash disappears quickly, and if you don’t write down everything you spend it on, you’ll get a distorted view of your spending and where your money is going.
7. Written and Realistic Goals
This is a big one, and it’s not part of most personal budgets. Although written financial goals are not a required part of the budget and are not included in most budget sheets, they are a crucial part of financial planning. By setting realistic goals such as saving to buy a home, purchasing a new car, getting out of debt, saving for retirement, or saving for your children’s education costs, or even having a budget for travel, you can start to find ways to save for those goals and track how close you are to achieving them.
8. Regular Reviews
Most
These features of a successful budget are things that should be included in the budget itself. However, there are also exercises and practices that accompany the creation and maintenance of a budget. One of those practices is regular review.
9. The Right Mindset
Last but not least, all successful budgets are approached with the right mindset. While it may be tempting to view your budget as constraints, it is a way to take control of your money so you can tell your salary what to do, rather than the other way around. Budgeting can be tough and even stressful exercises, but it is essential for financial success. By adopting a positive mindset toward budgeting and staying motivated, you can be on the right path to achieving financial security through budgeting.
Frequently Asked Questions (FAQs)
How can I start budgeting?
The first thing to do when creating a budget is to calculate all your income and expenses. Review a few months of bank statements, credit card statements, and any other records of cash inflows and outflows. Total up your income and categorize your expenses. Once you know where you stand, you can start identifying areas where you can cut back and set limits that should be placed on each category so that your spending is less than your income. From there, you can work on achieving savings and investment goals, along with any discretionary spending you want to plan for.
How can I stick to my budget?
Everyone has their own reasons for struggling to stick to a budget. If you are having difficulty adhering to yours, it can be helpful to examine what is making it tough for you. Perhaps you didn’t include any rewards in your budget, or maybe your spending goals are unrealistic. Once you identify the issues, you can better focus your efforts to stay on track.
Source: https://www.thebalancemoney.com/what-makes-for-a-successful-budget-1289233
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