If you’ve been an ardent follower of this blog, you would attest to the fact that we mention “Budget” in a lot of our articles. This emphasizes the fact that budgetting is one the most important keys to achieving financial success. A budget is simply a spending plan, and as you know, there’s no important task that should be carried out without first making a plan. As the popular saying goes, “if you fail to plan, you plan to fail”, therefore in order to avoid failure in your finances, you definitely need a budget.
Now that you’re convinced about the neccesity of a budget, the next question would be “How do I go about it?”. Not to worry, we have outlined 5 simple steps to help you.
- Set A Financial Goal: Like we already established, a budget is a plan, and you don’t need a plan if you do not have a goal to achieve. Therefore, the first thing to do is to set a financial goal. Your goal could be paying for a car or a house, saving for a vacation, saving for further education, etc. This goal will be your motivation to create a budget and more importantly, stick to the budget. You should review your budget as you achieve each goal.
- Outline Your Income, Expenses and Savings: Using a simple excel spreadsheet or a budgeting app, list out your total income which includes income from your side hustle, cash gifts, returns from investments etc. You also need to outline all your expenses (rent, food, entertainment, utilities, etc). If some of the income and expenses are one-off payments, you should divide it by 12 to get the monthly value. Lastly, you need to allocate a percentage of your income to your savings, no matter how small it is. You can take it a step further by making it a direct deposit automatically to your savings. This can be easily achieved using the Crowdyvest savings plans.
- Tailor Your expenses to Suit your Income: Now that you have a clear picture of what your finances look like, you can figure out the changes you need to make to reduce your expenses to either match or be less than your income. There are a few hacks you could use to cut down on your expenses. See them here. The goal is to cut down your expenses to the point where you have excess income which can be added to your emergency fund.
- Select a Budgeting Method: There are different budgeting methods to choose from.
- The Envelope method: This method is for people who aren’t able to control their spending using credit/debit cards. To fix this, withdraw all the money for expenses in cash and put them in labeled envelopes. Knowing that you have limited cash in each envelope helps you curb your excesses.
- The 50/20/30 Method: With this method, 50% of your income is allocated to your necessities (food, shelter, etc), 20% for savings and/or investments and 30% for personal expenses (travel, entertainment, etc). There are similar variations to this method where the percentage allocated to expenses are either higher or lower (E.g. 60/20/20 or 40/30/20)
- The Zero Budget Method: This strict budgeting method is best for people living from paycheck to paycheck. Priority is given to your expenses and bills, whatever is left is allocated towards achieving your goals.
- Stick With It: Now this is the final and most important step. The postitive effect of budgeting can only be seen when you’re consistent with it. This is why it is critical that you choose the budgeting method that works for you. Don’t forget to review your budget periodically to know if changes need to be made. When your income increases, try to avoid lifestyle inflation, allocate more money to your savings, investments and retirement plan.
Bonus Tip: There are different Budgeting Apps that are available to make this process easier for you.