Even with a decent income, you will still meet people struggling to make ends meet! I suppose a good salary should be a gateway to a happy life. Well, the reason lies in smart budgeting. People have yet to appreciate the importance of budgeting. The world presents us with spending opportunities, which makes people set themselves on a spending spree!
How do you salvage yourself from this trap? This article will debunk myths and impart you with the basic skills of smart budgeting. We believe you can take control of your finances by following this simple guide on budgeting for Individuals.
Understand your income for budgeting
You can only plan what you earn! So record all the income that gets to your pockets monthly. If you have other sources, Put them on track and allocate them to their respective income seasons.
Ensure that you are using the after-tax income when budgeting for individuals to do a proper budget!
Focus on after-tax, because that is your real earnings. If you have multiple sources of income and it gets challenging to determine the exact amount, use the averages. You can then plan once you have a clear picture of your monthly earnings.
Track your expenses
The next stage is to track your expenses. Most people ignore this important section, yet this is the root cause of most financial problems that majority faces. Have a record of your monthly expenses in a spreadsheet so that you can easily do a follow up.
Expenses do vary; therefore, you should portion them into fixed expenses and variable expenses. Things such as rent, loan payments, insurance, and mortgages will remain the same every month and fall in the category of fixed expenses. Expenses on groceries, entertainment, and transportation, keep changing, so have this under variable expense.
Why do we think it’s prudent to track your expenses? Well, it’s always good to understand your habits. Take a closer look at your bank or credit card statement to ascertain how much you spend in each category.
Setting clear financial goals is prudent in smart budgeting
You already know what you earn monthly and what you spend, right? It’s now time to set your financial goals. What do you intend to achieve with your finances? Maybe you aspire to be a doctor someday, so you should finance that PhD? Or maybe, you need to buy your apartment?
All this are valid; it’s the reason we are strongly suggesting that you have clear financial goals!
Your financial goals can either be short-term or long-term. Short-term goals may include saving for a vacation or settling a small debt. Long-term goals take on large sums of funds since they focus on finance-intensive projects.
Tip!
Your financial goals should be specific and realistic. Don’t just save money; save a particular amount for a specific purpose.
Divide your income into categories
What Next, Now that you have your goals in place? Go back to your income and subdivide it into categories.
The 50/30/20 rule seems to be the leading strategy that many experts take. More often, a large percentage of our income goes to our needs because we cannot avoid them. So apportion 50% of your income to your needs, such as food, transportation, and housing. These are the things you cannot avoid.
You still have another half left, so apportion 30% for what you want. This includes entertainment, dining out, and hobbies. Whatever is left is for savings and paying debts. You want to develop a culture of living within your means so that you don’t struggle with the things you cannot afford.
Stick to your budgeting plan
It’s easy to create a budget; the issue is sticking to it. Be faithful to your plan, or else you will find yourself in the initial stages every year-end.
How do you ensure that you stick to your plan? Well, monitor your expenses on a daily and weekly basis to keep you on course. You have no reason to fail in this because of the many free apps that can help you easily track your spending. Use apps like YNAB or Mint to track your budget.
Tip!
This budget is not cast in stone; you can always adjust it to fit your needs.
Build an emergency fund
Many will overlook an emergency fund, especially when everything is going smoothly. The emergency fund will make sense only during seasons of calamity. You see, we are in a world that is full of surprises, and you never know when your medical bills will spiral up. The rule of thumb is to save 3 to 6 months’ worth of living expenses in your emergency fund.
An emergency fund is like the safety net that will give you peace of mind as you re-strategize after a calamity without opting for credit cards.
Stay consistent and make adjustments
As you adhere to the basics of smart budgeting, we remain privy to the fact that income does change. With time, your income and expenses will increase, so there is nothing wrong if you keep tweaking it to gather for current events. Just be sure that you are within the acceptable standards.
For example, you won’t be paying debts forever. So in seasons where you are debt-free, focus more on areas such as emergency funds or any other fund that you will deem necessary at that time.
Also Read: What is Financial Freedom?
Final Thoughts
You see, smart budgeting doesn’t have to be stressful or complicated. Instead, it’s simply a way to ensure that you can enjoy the finer things in life without unnecessary pressure. By knowing your income, tracking your expenses, and setting clear goals, you can build a budget that works for you. In fact, this is the only way to take charge of your finances. With a solid budget in place, you’ll be better prepared for the future and can enjoy life with significantly less financial stress.
