Personal finance superstar Dave Ramsey defines budgeting well, he says: “A budget is telling your money where to go instead of wondering where it went.”
Making a budget is the most effective way to manage your finances, yet many people shy away from it because it may conjure up images of restrictions and a lot of hassle. Budgeting, however, is important because it enables you to save money, rather than overspend and to make the most of every rand.
Try this simple budgeting process
Irrespective of whether you make six figures a year or live paycheck to paycheck, knowing where your money goes will help you stay on top of your finances.
If you think budgeting is all about restricting where you spend your money and cutting out everything fun in your life, you’re wrong. It’s really all about knowing how much money you have, where it goes and then planning how to best allocate it.
In case you need a little more convincing, let’s take a closer look at the merits of incremental budgeting.
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The importance of budgeting
Establishing a budget gives you a clear picture of your long-term goals.
You’ll never be able to buy a car or put down a down payment on a house if you spend your money aimlessly through life, throwing it at every pretty, shiny object that grabs your attention.
Budgets force you to plan out your goals, save your money and keep track of your progress.
Today, people who abuse their credit cards do not always realise they are overspending until they are drowning in debt. Although you might have a general idea of how much money you can spend each month, it’s easy to lose control of your spending habits without hard, accurate numbers.
By creating and sticking to a budget, you will never find yourself in a precarious situation.
The budgeting process will help you stop worrying and enjoy your money more. Budgeting gives you the freedom to decide how much you will spend in each category. You shouldn’t feel bad about spending a large amount of your money on leisure activities as long as you’re still saving and meeting your other needs.
Set up your personal budgeting process
Follow this step-by-step personal budgeting process:
- Gather all your paperwork
- Figure out your income
- Make a list of your monthly expenses
- Determine your fixed and variable expenses
- Calculate your monthly income and expenses
- Adjust your expenses where you can
1. Gather all your paperwork
It is important that you have access to all information concerning your income and expenses.
Put together paperwork such as bank statements, investment accounts, recent utility bills, credit card bills, mortgage or auto loan statements, etc.
With this, you can then create a monthly average.
2. Figure out your income
What is your monthly income likely to be? Your net income (or take-home pay) can be used if you receive a regular paycheck that has taxes deducted automatically. You should include outside sources of income like grants or self-employment if you have them. If you are a freelancer, use your lowest likely income in a month as the baseline income for your budget.
3. Make a list of your monthly expenses
For the last three months, examine your bank statements, receipts, and credit card statements. Expenses that come up could include Mortgage or car payments, rent, insurance, groceries, utilities, eating out, travel, transportation costs, etc.
Categorize your expenses accordingly to get an overview of where your money is going each month.
4. Determine your fixed and variable expenses
Fixed expenses will be things you pay the same amount for every month such as rent, car repayments or an internet fee, variable expenses will fluctuate such as groceries or eating out. Be sure to include an emergency fund for ‘surprise expenses’.
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5. Calculate your monthly income and expenses
You’re on the right track if your income exceeds your expenses. If you have extra funds, you can put them towards areas of your budget, such as retirement savings or speeding up your debt repayment.
Use the 50/30/20 rule to help you spend extra income properly.
6. Adjust your expenses where you can
The simplest fix to an imbalance in your budget is to make cuts in your variable expenses.
With the addition of savings and investments under your expenses column, you should try to find an equal balance, and if you prefer an imbalance – let’s keep towards the income column 😉
Final thoughts
You know what really helps?
Using a budget template or app to make it quick and easy.
This is a great Google docs template. It will show you how to visually represent your budget. If that’s not your speed, try out this one from Microsoft.
People have found that setting up a personal budget has helped them stay out of debt.
If you’re struggling with debt, we could help reduce how much it costs every month and free up some of your income for other critical expenses. Try our online assessment at My Debt Hero to see if you qualify.
