When some people think of budgeting, they may associate a budget with being “restricted” with their expenditures. They believe they will not be able to enjoy the things they love anymore. Fear of not being able to eat out with a friend who stops by or buying their favorite designer clothes on the spur of the moment. This discourages people from even starting a budget. If only they realized that they are still in control of how their money is being spent. Remember, not all budgets are created equally. Just remember that everyone doesn’t find the same things at the same level of importance as you, so it’s important to have a plan that works BEST for your life. We need to look at budgeting as a way to make sure we accomplish what we need and want with our finances. Here are 6 ways to have an effective budget:
1.) Know Your Monthly Income
This is important because this determines how much money you are working with to save and pay expenses for the month. This income is the amount you bring home after taxes or income from your business. Make sure you include all side hustle income as well. Believe it or not, some people have no clue how much money they bring home each month. As it comes in, they just spend. They only find out their income when they do their taxes at the end of the year. Don’t let this be you.
2.) Save 10% Of Your Income
No matter what, pay yourself first. 10% is a great percentage to start with when it comes to saving your take home income. As soon as you receive your income, tuck this away and make note within your budget. Only use these funds in a financial emergency (such as leaky roofs, medical emergencies, or major car repairs to name a few). This also helps to stop the cycle of the feeling of living paycheck-to-paycheck. When you know you have cash on reserve, it calms your nerves.
In addition, make sure you save for retirement. If your employer offers retirement plans, make sure you participate. Also look into Traditional and/or Roth IRA’s. If you are a business owner, be familiar with the retirement plans available for you.
3.) Write Down All Monthly Expenses
Mortgage/rent payments, car notes, utility bills, insurance premiums, cell phone and cable bills. Write these all down in your budget. When you write these down, you will actually see areas in which you can save money. You may realize you don’t need the premium package with your cable provider. When you actually see what’s going on with your money.
(Don’t forget to write down an amount you estimate to spend on gasoline each month. Be familiar with the cost of getting back and forth to work. Start paying attention to how much you are actually spending on gas when it is non-work related. You may find you need to cut back on some unnecessary trips.)
4.) List All Your Debt
Have a plan to pay down debt and stay out of it. Lists all your debts from smallest to largest. Set an amount each month that you want to go towards debt (ex: $500 a month). Pay the minimum payments on all the debt each month except for the smallest balance. Always pay more than the minimum on the smallest balance. Once that is paid off, add that amount to the next smallest balance and keep going. Going forward, learn to exercise your patience by saving for what you want and buy with cash.
5.) Give Yourself An Allowance
There is no need to restrict yourself 100% by not doing and buying nothing you like when on a budget. How much people are willing to spend on themselves varies person to person depending on their financial goals. Someone who is more aggressive with paying down debt, may choose to not spend as much on themselves a month. Whatever the case, make sure you set an amount that works for you. When you feel restricted, you may eventually get discouraged and stop budgeting. Adjust as needed. This will help to make your budget work for you. This money is for nights out with friends, personal purchases, getting your nails done, etc. Make sure you still do what you enjoy with moderation if you have a financial plan.
6.) Remember You Are In Control
This is your budget. There is no right or wrong way to categorize how you spend your income. Listed are just some good common practices to have an effective budget. What you decide to save for yourself is up to you. How much debt you want to pay off is your decision. How many outfits you want to cash out on is up to you too. We are in control of our own financial destiny. Make sure you are making good choices.