Posts Tagged ‘about budgeting’

Top 10 Things You Must Know About Budgeting

Almost all of us have a common opinion about budgeting that it is a painful process, but at the same time, we also know it very well that it is a necessary “evil”. Creating a budget plan is not a difficult thing; the difficult part is to stick to that plan. This is where most people fail. What is more, there is also a group of people who think working on a household budget is a waste of time. The main problem is how we approach toward it. If you are working in a company where you are assigned a task to do a thorough analysis of the expenses and incomes (or revenue generation) of a particular department, you do it quite seriously. When it comes to household budgeting, the only difference here is that you are your own boss. If you can do a work seriously to impress your boss at work, why cannot you do it to impress yourself, your spouse, your kids, your family? You just have to approach it in the same businesslike fashion. You need not worry if you are bad at mathematics; you do not need to be a professional accountant to create and implement a successful budget plan. Following are the ten most basic things that you must know in this regard.

The Only Practical Way To Have Control Of Your Finances

The most basic thing about budgeting is that it is the only practical way that can help you to take control of your money rather than allowing your money to control you. It can show you the way on how to get a tight grip on your spending. You will be using your money not on impulses but the way it should be used.

You Have To Follow Only Three Basic Steps To Create A Budget

Who says the task of creating a budget plan is a painful one? There are just three basic steps you have to work on. First, you need to do a thorough analysis of how you are currently spending your money. Second, you have to set some short-term and long-term financial goals, based on your regular monthly income. It means you must have a clear idea on how much you can afford to spend every month; it will make it easier for you to decide which expenses are necessary, where you can cut down the fat from expenses, and which expenses can be avoided or postponed. Overall, this second step is all about learning how to live within your means. The last step is to monitor the progress. You must do a thorough review every month to find out if you are in line with your plan and are following those guidelines that you have set for yourself. Identify the areas of improvement and work on that.

Don’t Do It On Paper; Use Your Computer

A very common thing about budgeting failures is that many people try to work out a plan on paper and do all the calculations manually. This is really hard work unless you love mathematics. Besides that, this manual process also takes more time than necessary. You can make the process much easier and less time consuming by using a software program on your computer, such as Microsoft Money. Alternatively, you can simply use an Excel spreadsheet. This will make things more visible for you; for example, when you cut down some expenses, you will automatically be able to see how it affects your savings. This will help you plan everything more efficiently in a business-like fashion.

Do Not Make Things Complicated

A very important thing about budgeting that you must know is that it is not at all a complicated process; it becomes complicated only when you make it. So, do not drive yourself nuts. There is no need for overzealous attention to detail. Do not make so many categories or subcategories of expenses that it becomes very difficult to manage and monitor the same. Make fewer categories and have a miscellaneous category that should include all those expenses that do not fit in other categories.

Pay Attention To Cash Leakage

Most of the times, when people withdraw cash from ATM machine, the money soon evaporates from their pockets and they keep on wondering how it happened; worse, they do not have any apparent explanation. Therefore, it is very important for you to keep records of where you spend your cash. This step is particularly more important if you make frequent trips to ATM, more than once every week. Seal all those holes where you cash is leaking from unnecessarily.

Know Your Limits

If you are not living within your means and are spending beyond your limits, you are on a financially dangerous road. If you do not learn to live within your limits, you will soon be pushed into an ocean of ever-growing debts. People who go bankrupt are often the ones who never work on this basic thing about budgeting.

Learn To Differentiate Between Necessities And Luxuries

You must learn how to draw a clear line between necessities and luxuries. Hunger to achieve a better standard of living often forces people to consider luxuries as necessities. It is important for you to understand that quality of life is more important than standard of living. In order to achieve a better standard, people often keep spending more than what they earn and eventually get drowned so deep into the ocean of debt that it becomes almost impossible for them to get out of the same. When debts become unmanageable and impossible to pay off, it affects the quality of your life. It adds lots of stress to your life. You start having more frequent arguments with your spouse on money matters. Therefore, be ruthless in deciding what is a necessity and what is a luxury for you, depending upon what you can afford and what you cannot afford. If you do not find your income sufficient enough to cover all your costs, the chances are that you have dressed up some luxuries as your necessities. This is high time you must think about it.

Never Spend 100% Of What You Earn

If you are serious about budgeting so that you can stay away from financial stress, you should spend a maximum of only 90% of what you earn every month. Plan your expenses accordingly. For example, if you earn $2000, you should assume that you actually earn only $1800. Let the remaining $200 to sit in your bank account. Let it grow fast with every passing month. After a few months, you can use that extra amount of money for your big-picture items, for your luxuries. Please note that the 10% that you are not spending every month does not have to go to an emergency fund. You have to create an emergency fund out of your 90% of income only. You will find this approach more practical and more motivating, as it takes care of your hunger for luxuries also.

Do Not Count On Unpredictable Sources Of Income

While you are creating a budget plan, you should take into account only those sources of income that are regular. Do not take into account other unpredictable sources of income, such as investment gains, tax refunds, and other such things. When you receive money from those sources, it will be your bonus, which you can use either for some big purchases, for a vacation, or just to enhance your emergency fund.

Increase in income (such as annual raises) is often not really an “increase”

Last, but not the least, while you are learning about budgeting, it is also very important for you to understand that inflation is a constant feature of the current monetary system that is ruling all of us. Therefore, when you get an annual raise, do not start spending more on luxury because the chances are that your expenses have also increased in the same portion or probably in a bigger proportion; so, you have to be very cautious. Just compare the prices of grocery items; what you were paying one year ago and what they are charging now. It will show you the true picture. In fact, the reality is that the provision of annual raises is only meant to cover the financial burden put on consumers because of constant inflation.

Overall, when you keep in mind the above ten most basic things about budgeting and plan accordingly, there is no reason why you should fail to achieve the kind of financial freedom that you always dreamed about.


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