Whether you are a student, in your 20s, or a fully-fledged adult, managing finances can be difficult. Sometimes, the level of income can’t keep up with the number of outgoings and you start to build debts. The way to avoid this is to budget your money. Taking control of your spending and saving habits earlier on should keep you in good financial health for the rest of your life. It’s never too late to get a handle on your personal finances. This guide tells you how.
1) Record Your Income
The first step when it comes to creating a budget is to calculate your monthly income (after tax deductions). The primary amount will be the paycheck from your employer if you have a job. Then you should also consider any state benefits or loans that you receive regularly. Keep a calendar and make a note of the dates that you should receive these payments every month or few weeks. This can be difficult if you are in self-employment or do not have fixed working hours, so just try your best. If you have a side job, such as selling things online, then calculate the average total that you make from this each month. It is better to under-estimate than over-estimate how much you’ll have.
2) Track Your Expenses
The next thing to do is to record your spending over the next month. This is the only way to get the clearest idea of where exactly all your money is going. Keep every receipt, especially for cash transactions. You need to be able to note down everything that you are spending money on, from takeaways to bus tickets or petrol. Once you have all of this information, you can organize your spending into different categories. The most important one will be your fixed expenses – e.g. rent, mortgage, insurance, media services, car payments. Next is the necessary expenses, which you always have to cover but which can fluctuate in cost each month. These include utilities, groceries, and clothing. Then there are the non-necessary expenses. This covers everything from entertainment to dining out and personal care and luxury items. It will help to consult your bank statements and create a basic Excel spreadsheet.
3) Establish a Budget
Laying all your expenses out in front of you can be a wake-up call over your financial responsibilities. It is important to look closely at your non-necessary expenses to identify purchases which you can reduce or eliminate. You can pay more attention to the things that you should be concentrating on paying for, such as ensuring that all your bills are paid on time. To plan your monthly budget, you need to start by comparing your income to your outgoings. This is crucial to avoid over-spending. You need to allocate your income towards housing, transportation, and groceries – all things that are absolutely necessary. However much is left after these deductions, put 20% of it into savings. This can contribute to an emergency fund for unexpected expenses. Whatever you have left after that will be your disposable income for the month. You can spend this how you choose, as long as you are living within your means. It is important to ensure that your income covers all of your needs, some of your wants, and saving towards goals.
4) Set Savings Goals
Setting those goals is the way to ensure that you will stay on track financially. Aim to save at least 10-20% of your income each month. If your expenses are too high to allow that, then you need to identify non-essential purchases so that you can cut back. You also need to decide what you are saving for. It is a good idea to build an emergency fund which can cover your living costs for a few months in the case of an emergency. You can also plan for things like holidays, buying a car, or life events like weddings. Set a short-term savings goal for things like this. There are also long-term savings goals which you might consider, such as buying or renovating a home, contributing to your child’s education, or ensuring a comfortable retirement when the time comes. Set up savings accounts with good interest rates and arrange for an amount to automatically transfer into them every month. Having a safety net of savings will reduce your stress levels and prevent you from getting into debt. You can avoid overdrafts and loans.
5) Adjust Your Habits
One of the biggest challenges of budgeting is changing your spending habits. If you have gotten into the habit of going to the shop for coffee or lunch every day, then it can be difficult to swap to meal-planning and preparing food at home to take with you instead. But financial health comes at the price of cutting non-essential spending out of your life. You need to prioritize your needs and also wants that will benefit you in the longer term. Try not to make impulse purchases and never buy things just to impress others. Focus on what you actually value and enjoy to guide your habits. You can still treat yourself, but cutting down on unnecessary expenses will see your savings build faster. Start recording your expenses in an app or spreadsheet so that you can track them effectively. If you have a calendar, then write down the dates that important payments come in or go out. You should pay off debts and avoid relying on loans and credit in the future. In addition, it is important to invest in adequate insurance plans.
Consider the 50/30/20 Budget
The point of a budget is to divide your income appropriately to cover your expenses. One of the popular budgeting plans is the 50/30/20 division. According to this plan, 50% of your post-tax income should go towards your needs. This means all the expenses that are absolutely necessary for your survival. The lower amount of 30% should go towards your wants. This means non-essential expenses which improve your quality of life. The final 20% must go towards your savings. You can divide this into smaller amounts for separate savings funds if you have more than one savings goal. The 50/30/20 proportions are ideal for ensuring that you are comfortable financially and can maintain this. It is okay if your essential living costs are higher than 50% – you could adjust it (such as 60/25/15) with the aim of reducing your expenses over time. It is all about paying more attention to where your money goes and planning where it needs to go instead. You just need to keep yourself on track with your budget proportioning.
