Whether you're a business, an individual, or a family, you need a good budget to put your financial house in order. A budget is an estimate of a person's or company's income and expenditure. A good budget is significant because it helps you track your income, fixed expenses, flexible expenses, and unplanned expenses and savings. The same applies to your household. You need a personal budget to help you determine where your money goes and comes from. You should budget on a monthly basis because it’s a friendly timeline.
Benefits of budgeting
When you budget, you're bound to enjoy a lot of merits. Budgeting allows you to not only take control of your financial situation and money, but it also helps you predict your financial future through proper planning. Here are the leading benefits of budgeting.
- Effective money management
- Proper resource and cash allocation
- Better planning
- Proper decision making
- Goal achievement
- Monitor performance
- Ability to account for anything
- Better spending
Problems from failure to budget
Some people avoid budgeting because they think it's unnecessary and it’s extra work. These individuals miss out on the amazing benefits of budgeting. Instead, they encounter various financial problems because of their negligence. Some of these include:
- Risk of landing in debt
- Damaged credit score
- Difficulty in achieving financial goals
- Less financial control
- Overspending
- Stress
Steps to a simple and complete budget
1. Collect all your financial information
While creating your budget, you must try to recover all your financial information. This helps you make your budget as accurate as possible. You need a defined budget plan in order to avoid hiccups in the future. Gather your bank statements, receipts, credit card information, investment account information, utility bill information, and information about your loans and mortgages
2. Determine your income
Once you've put all your financial information in place, it's time to determine your sources of income. What brings you money? If you're self-employed and you get income from various businesses, then you must note each business and how much you earn from it. If you're a regular employee, note your net income (minus taxes).
3. What are your expenses?
Establish and account for all your expenses and spending. A list of all your monthly expenses and spending should include items like your food and groceries, utilities, mortgages, rent, entertainment, childcare, loans, and insurance.
4. Determine your needs and wants
After determining all your expenses and spending, you should take time to think clearly and compare all your expenses by weighing and grouping them into needs and wants.
Needs are the things you require in order to function and live a normal life. For example, food, water, and shelter. Needs are necessary for human survival. Wants, on the other hand, are human desires. They are the things you'd like to have. One can survive and function without them. For example, you can do without love or a car.
One characteristic of human wants is that they are unlimited and variable. Therefore, you should try to avoid spending on your wants. Or you could reduce the amount you spend on each of these wants. For example, you can cut down the amount of money you spend on your entertainment, gifts, and dates. Remember, when you prioritize, you are likely to accomplish your financial goals easily and smoothly.
6. Set your financial goals
While creating your budget, you should challenge yourself by developing financial goals. Goals not only keep you on your toes, but they're also an indicator of whether you’re making progress.
7. Plan and design your budget
Using your lists of needs and wants or fixed and variable expenses, you can now plan your budget accordingly. You should be able to determine almost the exact value of your monthly expenses using your fixed expenses.
8. Adjust appropriately
Now that you have a budget, this is the appropriate time to adjust your expenses fittingly. For example, if your monthly expenses are more than your monthly income, it's your responsibility to find a balance between the two. In fact, your income should always be more than your expenditure. You can achieve this by reducing the amount of money you spend on variables and wants.
Note that there are cases where your numbers might not add up even after cutting down your expenses. If you find yourself in this situation, then it’s okay to cut down the amount you spend on your needs and fixed expenses such as rent. After catering for all your expenses, you can begin a saving plan.
9. Frequently review and look ahead
Lastly, whenever you find the time, you can check out your budget to see and ensure that everything is going as planned. If you're on a household budget, you can mirror your budgeting with other families. Also, if you're a business, you can carry out a benchmark study with other firms and see how they budget for their day-to-day activities.
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