How your expenditure compares to your income dramatically determines the degree of your financial health. It will be challenging to achieve your financial goals if you spend more than you make. A budget helps keep track of your spending habits and compares them against your income streams. Creating a budget shall help you spend your money wisely. Below is a beginner’s guide to help you understand the basics of budgeting and which steps to follow for budget creation.
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Budgeting basics for beginners
The goal of creating a budget is to enable the budgeter to control spending and commit financial resources where key priorities lie. Below is a simple budgeting template you can follow
1. Gather up all your financial records
To create a budget, you first have to assemble all your financial records from bank statements, utility bills, credit card expenditures, mortgage, and car loan agreements. With these records, create a monthly summary of the average spending for each item. These statements will offer you a clear picture of all your income streams and spending habits.
2. Know your income
How much do you make in a month or a quarter? If your sole source of income is a regular paycheck, your income will be the amount left over after taxes and other statutory deductions. If you have more than one stream of income, note down the net revenues for each stream. The same principle applies if your primary source of income is a trust fund or social security, your income will be the actual amounts you receive from the fund.
3. List all your fixed expenses
Expenses can be fixed or variable. Rent or mortgage repayment, car loans, student loan, or personal debt fall under the fixed expense category. Fixed costs are easy to keep track of because they stay the same month to month. However, default and late loan repayment do attract penalties which can drive up your fixed expenses.
4. Track your variable expenditure
Variable expenses are those which fluctuate from month to month. For example, your electricity bill is unlikely to be the same during winter and summer if you use electricity for heating and cooling. Utility bills such as groceries, gas, beauty products, and household purchases also fluctuate widely from month to month. When listing and tracking your variable expenditure, it is advisable to review financial statements from at least three months.
5. Compare income and expenditure figures
Summarize your earnings and expenditure to determine if you live within your means. If you have some income left after covering all your expenses, consider setting aside some funds in a saving account or repaying debt. If your income barely covers your expenditure, then it’s time to make some changes to free up resources.
6. Dealing with over expenditure
If you overspend each month, it’s time to identify areas where you can trim your spending. For instance, if you eat out often, consider having more meals at home to free up some money. You can also cancel or downgrade club and gym memberships that you don’t fully maximize.
If cutting down on your variable expenses doesn’t do much to balance your income and expenditure, you may have to trim down fixed expenses. For example, you may need to move to a cheaper house or cut down on gas and electricity bills to balance your budget.
7. Trim your credit card debt
It becomes challenging to achieve your financial goals if you have spiraling debt. Credit card debt carries high interest and can quickly mount up before you even know it. Clearing any credit card debt is an excellent place to start for beginners. If your budget allows, consider making extra monthly payments to trim down and eventually clear credit card debt.
8. Planning for future homeownership
Homeownership and auto loans can occupy a significant portion of your monthly expenditure. If you intend to purchase a home, you will need to carefully evaluate your housing needs and settle on a payment plan you can afford.
Creating a reasonable budget requires planning and an excellent understanding of your income and expenses. Poor debt management will downgrade your credit score and hurt your chances of meeting your budget goals.