7 Steps To Create A Budget You Can Actually Follow Through
With everything going digital these days, it almost seem like you need to super computer that runs a nasty financial software to create a bad-ass budget. You can then claim victory over your eternal nemesis – Overspending.
But despite the millions of dollars that venture capitalists have been poured into the development of eye-candy software, you must be out of your mind to think that you couldn’t possibly conceptualize a neat budget without one of those programs that that sell for $69.95.
Granted, anyone should be shamed for not embracing the efficient changes that technology brings to everyday life. But really, for a household budget, this could be a case where the past is the answer to the future.
That’s not to say that budgeting software are useless. They make things so easy. It’s just that you don’t need to postpone a more money-savvy lifestyle just because you don’t have a cool software to help you. If you can afford it , or already have it on your desktop, go ahead and start letting it pay you back your investment.
Step 1 – Itemize and list your income and expenses
This seems like the most basic thing to do for a household with a keen eye on finances. Yet not enough people do it due to stubbornness or simply… laziness.
Generally, people think that by default, their only income source is the salary. That is not 100% true. There is interest on savings and deposits, dividends on stocks, returns on bonds, claim disbursements from expenses, etc. It’s not a joke. Take everything into account and list them down.
The expenses sheet is the tricky part. Because on the hand, we want to track down what we have been spending that money on. On the other hand, we almost feel the pressure to under declare expenses so that we don’t have to admit to ourselves how wasteful we have been. That is without mentioning the cranky spouse that will interrogate you on why you spent money on “useless” stuff.
Step 2 – Commit to a time frame
It’s no use setting a target of spending on $2500. Is it for a week? A month? A quarter?
You need to be more specific than that.
It really depends on your personal circumstances. But the most common time frame that households set is determined by the frequency of when they receive their main incomes.
The most common practice around the world is to receive the salary either on a weekly, bi-weekly, or monthly basis. If you are not on any of the 3, you must be on some sort of special arrangement with your employer.
You can’t go wrong with setting your time frame to match your main income inflow.
Step 3 – Tracking
This is when a proper software can actually relief you from a little hassle.
You might think that taking note of every dollar that comes out of your pocket is a little extreme. But I can assure you that it is not. Extreme circumstances call for extreme measures anyway.
I’ve been there.
During a period in my twenties, I was so tight on cash flow that I literally wrote down every cent I spent as soon as I spent it. I even wrote down the transaction details with every swipe of my credit card. It’s not something that I’m proud of. But it’s not something that I’m ashamed of either.
The good part is that I can have a clear view of where my money is going at the end of each day.
Carrying a notebook with you can be cumbersome. But these days, smartphones have note taking apps that allow you a cumberless way to input information quickly and effectively.
Step 4 – Categorize
This is another step that most people feel is too stupid to undertake.
I get it. You feel like a child being lectured to do something like this. But is an essential step to get a clear picture of your money flow. Sure, you can tell what a particular expense is without writing it down. But you wouldn’t be able to get an overview without mapping your expenses out. This is why you have to do it.
Some common categories include those for housing, food, transport, etc. Come up with your categories at your own discretion.
Step 5 – Tally up the numbers
At this stage, you have already got over the most troublesome parts of budgeting. It should be smooth sailing from now on.
What do you do with all the numbers you have collated through the timeframe you have determined? You sum them up of course.
This is child’s play. Add up all the income and subtract all the expenses.
This will give you an idea of how much you are overspending. And with the list of expenses that you have drafted in the earlier steps, you can now see where that extra money is going.
Step 6 – Monitoring
With tracking added to your budget, it should now be a breeze to monitor your expenses. The objective here is to prevent your cash from leaking out of your wallet.
You should be able to quickly identify where leakages are appearing to take quick action to fix it or adjust your spending allocation to make up for the loss in numbers.
If for example, you find that you are overspending by 10% of the weekly budget, go through your receipts to identify where the leak really is. Take notice of it and prevent yourself from repeating the same mistake again in the next budget. For example, if the purchases at the supermarket getting too high, find ways to value shop on groceries.
Step 7 – Review
You can’t be living on a fixed budget over a lifetime. Things inflate and incomes rise. So it’s only normal for your budget to be adjusted accordingly.
It’s not always bad news when you have to revise the budget upwards significantly. Sometimes, we buy a new house, sign up for extra insurance, or the children need to go to college. Things happen.
The important thing is that you should be flexible in spending more for things that matter. No point keeping all that money in the vault and stop your lifestyle from progressing. Progress is what drawing up a budget is for right?