Why Do You Need a Budget?

Many people live in constant fear of taking too much from their credit account when the bills pile up.

Do you receive income monthly but find yourself spending much more than you make? Or do you have no idea about how your money disappears every month?

Here’s what’s going on:

You are not keeping yourself accountable for your spending. This is why you live beyond your means and find yourself in debt almost every time.

One of the ways to fix this is by creating a budget and sticking with it.

It already sounds difficult, but there’s a way to create a budget that doesn’t cause you to change all your habits overnight.

Before we look into that, let’s see the reasons why you need to create a budget that works for you.

Why Do You Need A Budget?

1. Have money in hand for unexpected expenses such as medical emergencies.
2. You know where your money goes and can adjust as necessary.
3. Save money towards your goals, e.g. retirement, a vacation, car, college, etc.
4. Pay your bills on time.
5. Reducing debt.

How to Create a Personal Budget

1. Know What Works for You
2. Figure Out Your Financial Status
3. Save First
4. Organize Your Spending Activities Based on Priority
5. Create Categories 
6. Sum Up the Categories
7. Adjust

Know What Works for You

Most people believe that budgeting is hard because they’ve seen other people on budgets and don’t think they can live that way.

The thing about budgeting is that there’s no single way to budget. You can only get successful at it when you understand that it is a personal thing.

You could decide to budget using a budgeting app like Mint.com, while your best friend may use a budgeting printable to organize his expenses.

You have to discover what works for you. This includes the budgeting tools you prefer, what time of the month you create your budget, and how you organize your spending.

Figure Out Your Financial Status

The next question to ask yourself is “how much do I make each month?”

If you start budgeting today, will you be able to get through with it by the end of the month?

Apart from calculating your current income, you also have to look at how much you spend every month. Look at your expenses in the last 2 to 3 months. If you don’t keep the bills, you can look at your bank account and credit card statements to get an estimate of how much you spend monthly.

This will help you know how to plan your budget.

Include your monthly bills and expenses like insurance, vehicle maintenance, birthdays, and other expenses that could come unexpectedly.

Save First

Before you even start planning your activities, you have to separate your savings. You don’t save what is left after budgeting. Instead, you save before you budget.

You should plan to save between 5 and 50% of your income depending on your age and income.

The best way to save is to group it into different sections such as retirement savings, vacation savings, college savings, emergency funds, etc.

By doing this, you can easily hit your savings goal.

For instance, if you saved for both vacations and emergency funds in the same wallet, you may end up spending all the money on vacations and have nothing for emergencies.

Organize Your Spending Activities Based on Priority

Now, you’re left with a smaller amount after saving some money. It’s time to organize your spending activities and create that budget.

You’ve already written down all the spending activities you carried out in the last 3 months. Examine if you’ve been spending in line with your priorities.

Identify which tasks on the list are most important than the others and write them down. Then, organize the things on your list based on importance.

Create Categories

This is the main budget-planning stage. To create a budget that works for you, you have to group it into various categories.

The number of categories you create depends entirely on you.

Some people create 2 or 3 broad categories and they’re good to go. As a beginner, it is better to start with smaller categories.

Start with compulsory expenses like mortgage/rent, car payment, debt payment, insurance payment, utilities, etc.

Then, plan a budget for groceries, transportation, entertainment, clothing, etc., based on the information you’ve gathered from your spending history. You can decide to go even more detailed, budgeting for Starbucks coffee and other little things.

To get the amount to include with each activity, calculate the average of the amount you spent in the last 2 or 3 months. Write it down beside the activity.

Sum Up the Categories

When you’ve finished creating these categories and assigning numbers to each of them, it’s time to add them up.

First, write down your expected income (average income for the past two or three months if they’re close), and subtract your monthly savings.

The remainder is what you’re working with. Here’s what you’ll do next:

• Sum up the compulsory expenses and subtract from the total.

• Add the remaining expenses and subtract them from what’s left.

Adjust

If you’ve been spending more than you make monthly, you may get a negative value. It means that you’ve not been paying attention to your finances in the previous months, and you’re most likely in debt.

You can still fix this on your budget. You’re going to try to fit everything in.

Start by adjusting the amount allocated to lower-priority activities, e.g. entertainment and gifts.

You don’t want to change your lifestyle drastically, so only make small cuts until the numbers tally.

As months go by, you’ll find yourself cutting down these numbers further as you are now aware of where your money goes and how you can reduce unnecessary spending.

Frequently Asked Questions on Budgeting

How do I budget when my income varies each month?

Use the income value of the last two months and calculate an average if the numbers are close. If they are not close, write a budget based on how much you received the past month. This means you’ll have to plan a new budget each month.

What is goal-based budgeting?

This is creating a budget based on goals that you’ve set for yourself or your family. This type of budget focuses on hitting your set goals without considering your past expenses.

How much should I budget for debt payment monthly?

One of the things you should include in your budget is debt payment. You should start by budgeting the monthly minimum payments. Pay the smaller debts first before moving to larger debts. If after the budget is completed there’s still money left, you can use it to pay more than the minimum payment on your debts.

Do I budget for gifts and holidays?

Include gifts and holidays in your budget. You should only allocate a small percentage of your income to it every month so that the money piles up over time.

What are budgeting tools?

Budgeting tools are tools that make it easier to plan and track your budget. They include apps like Mint, Pocketguard, and You Need a Budget (YNAB). If you have your budget figured out, you can use them to organize your money and keep track of your expenses.

How do I budget for unplanned expenses?

The best way to budget for unexpected expenses is by creating sub-categories in your budget that cover them. This is why it is best to start with smaller categories. You may have some money in sub-categories that you don’t touch. They could come in handy later on. For instance, if you keep putting $50 in appliances every month, and you don’t spend it on anything for 6 months, if you need to fix your washing machine in the 7th month, the $300 you’ve saved can be used to settle it.