Understanding your income and expenses
The first step in preparing a budget is to understand your income and expenses. This can be easily done by noting down your income and expenses for one month. This will help you to understand how much you spend each month and compare it with your current income.
Simply the purpose of a budget is to allocate your income into different expenses and make the expenses less than the income.
If you are spending more than the income, you are simply going to financial crisis.
This is what the simple term of budgeting is all about. It is not depend upon the income level. If you can do it for a small income, then you can do it on a large income.
So now you are identified your expenses and income for one month. If your expenses are less than your income, oh! Good, you are now on a good shape to get a full breath. But look you can improve it even better!
Your expenses are greater than your income? Don’t worry, you can make it correct. Also know that you are not the only one who has such a report initially. If you think to make a budget, be happy that you are one who thinks to get out of it.
That is if you are having an income $ 1000 and you spend $ 1100. That means you need an extra $ 100 to meet your expense. You will now run around to find how you will get it. Get out of this problem by making a budget.
Two things you should remember while preparing a budget is that your expense must be less than the income or at least it must match with expenses and you should allocate money for the particular category as soon as you put it in the budget.
I meant here the same thing use your credit card similar to cash. Otherwise you cannot control your expenses with this budget.
A simple budget
This budget is for those who doesn’t like to make a budget or for those who likes a small budget to start initially. It is as easy as you can’t think.
Identify some major expenses that you cannot avoid, it will be two to four categories rather than twenty to thirty categories in a normal budget. Put some amount ( you have to put above 10% ) as savings. Put aside some amount for your investment plan like retirement plan, insurance etc. Now the remaining is put for your other expenses. Your budget is over!
It is a very simple budget that I will explain it with an example. Let your income be $2500 per month. Your main expenses may be tithing to church, house expenses, and travel. Let these expenses will be $ 200, $ 1000, $ 250 respectively.
Now your simple budget will be as follows:
Income: $ 2500
Tithing: $ 200
House expenses: $ 1000
Travel: $ 250
Savings: $ 200 (10% of income)
Investment (may be retirement plan): $ 250
Other expenses: $ 600
Your simple budget is over.
This budget is for people who don’t want to budget. It is simple, doesn’t take up much time, and will help you reach some goals. But it is not a complete approach for manage your money full and effectively.
A complete budget
Now if you want to get full benefit of planning and budgeting, you should follow a complete budget. It takes a little more time and energy but will give you more financial benefit.
This is simply an expansion of our simple budget. In this budget you need to put all the categories you have in your expenses than 2 – 3 categories we put in simple budget.
In this method our intention will be to reduce the unexpected expenses which can cause problem in tracking your budget. I also recommend you to put a variation expense category in your budget to meet the unavoidable unexpected expenses.
So in the same way as described above for simple budget, you can make a complete budget with all expense categories.
When you make a budget, you should be careful to use realistic amounts in budget. If the numbers you use are not realistic, no use of it.
Even if your expenses vary much, change in the next month for a suitable number in the expense column, which will give you more realistic. Thus you can improve your budget every month.
Look into the following matters when you make a budget.
First, start with noting down your income.
Second, analyze your biggest expenses. These expenses may include repayments, rent, insurance etc.
Third, analyze the regular expenses. This may include food, travel etc.
Fourth, categorize your expenses in the categories which suit you.
Fifth, allocate your income in each category.
Sixth, track your budget by noting the expenses as soon as it occurred.
How to track your budget
It is the hardest part in budgeting. If you make a budget and not able to follow it there is no use in making a budget. So tracking your budget continuously is important in managing your money.
Read my blog ‘A list to categorize your expenses’ and include most avoided categories like entertainment, personal, tax, variation expenses etc in to your budget. If you avoid these expenses categories then it can make problem in your budget as these categories cannot be avoided now.
You can track your expenses only if you put another column for actual budget. Note down the expenses at the time itself when it occurred. This is important for tracking a budget.
That is you should stick with the budget. Don’t allow your budget to go above the budgeted provisions plus the variation expenses allowed in the budget.
Groceries and utilities are some of the category which can destroy your budget, so be careful in dealing with that. Put a limit in these categories and spend carefully.
Another tip in controlling expenses is to pay the bills as soon as it occurred. This will help you in not paying extra money as fine or penalty or late fees and also to control the expenses according to the budget.
Three processes are important for making a budget. They are
1) Understand income and expenses and categorize them,
2) Making a budget by allocating sufficient fund to each category, and
3) Tracking your budget by putting an actual budget column.
Thus the budgeting will become more effective. Use your money well with proper budgeting.
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