Last week, I kicked off the Monday money series with how to make better financial decisions this year and in that post I mentioned living on a budget and not spending outside your budget. However, alot of us do not even know how to draw up a personal budget, talk more sticking to it. So in this post I will be giving a step by step guide to draw up a personal budget that works for you.
A budget is a financial plan with a defined time frame. For example we can have our weekly, monthly budget, annual budgets. A budget is not just something we come up with, it is a plan for our money hence it is supposed to be well thought out and carefully written down.
Alot of us see a budget as restrictions and alot of things we cannot do with our money and this is low-key the reason why we really hate budgeting and find excuses to not plan our finances. No it’s not a money frame that allows us see our money but not spend it.
A budget should be seen as a powerful tool that helps us manage our finances to get the maximum use of our money and achieve our set financial goals.
There is nothing more powerful than having reins of our finances so this is where the need for drawing up our personal budget comes up.
Drawing up a Budget is an exercise and for this exercise you will need a journal, paper, pencils or pens and some extra paper, and of course your phone or laptop to check your financial expenses in the form of bank statements, credit and debit alerts, etc
Step by Step Guide to Budgeting.
Gaining control of your finances start with making a budget and sticking to it religiously. A personal budget summarizes expected income and expenditure for a period of time which could be weekly, monthly or annually. For someone new to budgeting my advice is to start with a weekly budget before graduating into more complex budgets. Why? Simply because if you can budget for a week, you can repeat it and stick with it. Here are however some steps to guide you when drawing up your personalised budget:
Step 1: What is your Financial Goal?
We all have financial goals that we aim to achieve every year. For example my one of my financial goals this year is to live on a budget, spend less and invest more and also save some extra cash for a vacation. Write your financial goals and let these goals guide your budget.
Step 2: What is your Income?
The second step in budgeting is to identify every source of income. Some of us have 9-5’s that bring in salaries, others freelance and have multiple pay days, others do both. Identifying everything that brings in cash to you, could be salary/wages from your job, tips from your side job, interests on your investments, commissions from affiliates and so on. Dig out and write down all the information on the monies you are most likely to receive every week, month or year. Check your bank statements, checks, bank balances etc to get the information needed. Why do this exercise? Because most of us do not know our earnings, we don’t know how much we are actually worth. How do you make a budget that works if you don’t have the full information on your earnings.
Step 3: Track and Categorize all your expenses.
We all spend money every day, tracking your expenses by writing down everything we spend more on or are most likely money on gives an idea on how much money you roughly spend everyday/week/month/year. When you have successfully tracked all these expenses, proceed to create a list of weekly, monthly or annually all depending on the type of expense. After this we categorize the expenses to three groups
I. Expenses incurred weekly
II. Expenses incurred monthly and
III. Expenses incurred yearly.
Step 4: Total and Adjust expenses.
After the expenses and income have been tracked and categorized, the next step to to calculate and total the expenses and compare it to the total income after tax . Simply put you calculate the amount you are likely to spend every month and put it against your total amounts you are likely to receive. Why do we do this comparison? To know the true state of our finances, alot of us spend more money than we receive this is how we invite debt.
The essence of a budget is to ensure that we spend money within our paychecks. And spend wisely so that we will have enough money every month to go about our daily duties an also have enough money to save.
When planning out a monthly budget after knowing your income and possible expenditure you define what percentage of your salary will be saved. After that find the best ways to cut down your expenses for example if you take uber to work everyday maybe taking a bus will be best to cut down on your transportation expenses. For feeding instead of doing fancy restaurants for dinner every other day probably limit it to once a week or once a month and cook. Cooking is way less expensive than fine dining. You can pack your lunch to school or work everyday to avoid spending more than planned. You can also switch from really fancy restaurants to less expensive but equally good restaurants. Also if you love shopping restraint yourself. Don’t spend money buying shoes, bags, gadgets you actually don’t need.
Fixed expenses such as rent, light bill, water bills should be adequately planned for. Some people prefer to pay yearly and open a fund or separate bank account for these expenses. This fund is where they put away money every month that will be used to pay for the rent as that the next due date. You can also apply this method to saving for a new phone, laptop, car, house or your dream vacation.
Note: Always ensure that your income is higher than your expenses and you save a percentage of your income every month. This is what I personally call the Golden Rule to Budgeting.
Step 5: Review and Rebudget Monthly.
You should always review and “rebudget” your budget every budget month (did you see what I did with the words there? Lol). Anyways always review your monthly budget every month to suit your current financial situation because your income may increase at any time and so may your expenses so reviewing your budget at the end of every month while you draw up another budget is always good. Reviewing your budget also helps track your spending it helps you know if you have gone above or below your monthly budgeted spending limit.
Do you have a monthly budget? What do you put into consideration when drawing up your budget? Enjoy your week ahead. Love D. A.