Creating a budget is something that many people have tried to do, with varying success. For most of us, it is quite similar to creating a list of new year resolutions; it sounds great, works well in the first month, and then seemingly disappears. Creating and sticking to a budget doesn’t just sound nice, it has quite a few benefits. It helps to keep us focused on the goals we have set; it prevents us from spending money that we simply don’t have and it helps us to be able to deal with emergencies when they pop up.
The biggest benefit is that it helps to reduce stress by providing structure, which is very important for mental health. Most budgets fail or are abandoned because impossible guidelines are set and unrealistic expectations aren’t met. However, creating a budget doesn’t have to be difficult and there are a few tips to follow to make the process much smoother.
Track your spending
This is the very first and most important step when making a budget. You absolutely have to note down what you spend your money on and the group those things. Common groupings could be food, travel, entertainment, hobbies, rent, internet, etc. Do this for one month before creating your budget to see where your money goes. This was the first tip that I picked up from Crediful and I can honestly say it has made a world of difference to my finances, if you’re not aware of where your money is being spent it’s very hard to change it.
Fixed expenses, money that you spend on things that have the same amount every month such as rent, should be listed first. Then variable expenses, money that you spend on things that have different amounts every month, should be listed after. This can be helpful to see where you could maybe spend less if need be, or to change to cheaper services.
Now that all of your expenses have been noted down, grouped, and prioritized, you can move onto something else that most people don’t consider: disposable income. Disposable income is the money that you have leftover when all expenses have been paid for.
There are two common reasons why people don’t take disposable income into account when creating a budget. Either it’s assumed that money can’t be saved if it is being spent, or people convince themselves they won’t spend too much monthly. Setting an allowance for disposable income is important since it serves as a reward for creating a budget that allocates expenses and to savings.
Additionally, having an allowance for disposable income ensures that a person does not overspend.
Don’t be unrealistic
When creating your budget, you may have the best intentions and have the goal of saving a boatload of money monthly, or throughout the year. While it is admirable, it might also be unrealistic.
The danger with unrealistic goals is that they are nearly impossible to accomplish and as a result, it could be very demotivating, which might lead to the budget being abandoned. Instead, create small goals that are easier to accomplish, then build up to bigger ones. Accomplishing these smaller goals will increase your confidence and give you a positive mentality that the budget is working, which in the long run will help you to continue to save money. Consider which idea seems easier to achieve; flattening a mountain or a molehill?
Make it weekly
In lieu of setting smaller goals, creating a weekly budget may also prove helpful in the attempt to sticking to it. Aside from this, little expenses that are incurred throughout the week can be tough to track, and a broad monthly budget may not incorporate or account for those.
For example, perhaps you decide to buy a snack, would that be grouped as food or as part of your disposable income? What if you buy a snack every second day? To eliminate this hassle, it would be a good idea to create a weekly budget after calculating income and expenses. For example, perhaps your groceries are $800 for the month, so making an allowance for $200 a week will help to see the cost of every individual meal.
Not only will this allow you to see how small short-term costs add up, but it will also give you the opportunity to change your spending habits and see what can be tweaked.