Managing your finances and paying off your debt can seem like a never-ending process. The best method to eradicate debt or save for big expenses is to budget effectively. With the help of so many apps and tools, personal finance or budget management has become much simpler and there is no need of advanced accounting.
Below are some simple times to help you get started with creating an effective budget.
1. Know Your Income
There are a lot of people who do not know exactly what they earn. If you are an employee, your paycheck is divided into different categories, mostly gross income, and net income.
- Gross Income: this amount is before any taxes & deductions
- Taxes: any state, federal or any other form of taxes
- Deductions: any amount that does not include taxes, medicare/ social security/ 401(k)/ health benefits
- Net Income: this is what you take home.
2. Itemize Your Expenses
Monthly budget(ting) tips, can only be effective if you know what you are spending your money on. The best methodology is to go by your bank statement, from the past three months. This helps you to have an overview of where your money is going. Below are different types of expenses:
- Recurring Charge: this can be monthly charge and includes subscription fees
- Needs: you need it for survival e.g shelter | food | work commuting fees | child care
- Wants: cable | excessive shopping | dining | social activities – basketball tickets
- Fixed Expenses: this may fall under needs, additional expenses include, car insurance | health care bill | debt repayment
The importance of itemizing your expenses is to have a full scope of what you own versus what you owe. Having a clear picture of your expenses is the first to creating a budget and managing your debt
3. Categorize Your Expenses
Once you have itemized and totaled your expenses it is time to distribute your income. The best approach for simple budgeting tips is to divide your expenses into categories.
- Saving & Retirement: 401(k) | emergency fund | saving accounts
- Household Expenses: rent or mortgage | utilities | insurances | repairs | groceries
- Social Activities: cable bill | cell phone | streaming bill (Netflix) | dining | movies | gifts
- Debt Payment: student loans | car payments | credit card payment (and yes family members we owe money too)
This will give you detailed analytics of your finances by showcasing how much you are spending on each category. Health care expenses are usually covered from your paycheck, but if not then include them in your household expenses.
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4. Personal Budget Tips
Now that you have categorized your expenses it time to implement personal budgeting tips. There are numerous budgeting tips, but the most important aspect is to implement tips that are useful and effective for you. Below are some tips
- Budget before the month begins – set aside money to operate and run your household for the month. Yes most of us are paid on a bi-weekly basis and cannot pay all our bills with one paycheck, then the best way to allocate expenses that will be paid by the 1st check such Household Expenses and use the 2nd check to cover the remaining bills
- Track Your Expenses – the period between the 1st and 2nd check is crucial, this when a lot of unnecessary spending happens. Be mindful of that debit card, it is so easy to keep swiping. The best approach is to all always write a list of what you want to buy, and then see if it fits your budget for that specific month.
- Due Dates – this is one powerful method you can implement. When you itemize your expenses also note when the bill is due. You can have all household expenses be due around the same time, this is will help in tracking and managing your bills. You do have the option of changing your due dates to fit your payday. Arrange your due date so that it more advantageous for you.
In accounting and finance, we have a saying, “Chase Your Receivables and Delay Your Payables”, the same principle is applicable when it comes to due dates.
5. Emergency Fund
This is one of the biggest issues with budgeting, life happens and there are numerous things that can go wrong at the same tips. Managing your budget becomes unbearable in these circumstances, this will be the reason why it is so important to boost your emergency fund as soon as possible. This should be the first part of your savings before investing or any other money distribution activities.
6. Borrow from Your Budget
Another way to keep your budget intact is to borrow from other categories. For instance, if you are are going to be in arrears in the Household Category, then it advisable to borrow from your Social Activities. Do everything to balance your monthly budget as this will help the bottom line.
7. Save For Big Expenses
The majority of consumer debt involves a credit card or loan financing of some kind. It is better to save and pay cash for goods, for instances Household Furnishings, instead of taking a loan and have to pay a monthly payment associated with extremely high interest rates, it better to sit on the floor or go to Goodwill get a couch. You work so hard for your money and it’s time to let your money work harder for you, getting a loan is not the best option, instead invest that money.
8. Automate Your Finances and Budget
There are many apps, tools and banks that now offer free services to manage your money. Invest time in learning which is the best tool to use that fits your goals. The most effective method to automate your paycheck into your savings or other investments accounts before using your money.
9. Be Budget Friendly
It takes time to adjust and for your new budget to kick in, therefore, do not be so hard on yourself if you fall short in the upcoming months. This may require a lifestyle and mental change and that is never easy. Personal finance or budgeting techniques require action, discipline and accountability for you to see any improvements. If it’s overwhelming, just do one category and move on to the next one. Any action is better than any passive approach.
10. Be Realistic
Let’s be honest, not everyone earns the same or have the same responsibilities. Budgeting needs are going to different if you earn 50k or 100k, there are many challenging factors that makes budgeting difficult. A household can spend $100 a month on groceries and you spend $100 a week, the best approach is to create a budget that is realistic for you.
Creating a realistic budget not only helps your finances but creates a higher chance for you to become successful in your money managing capabilities. The sooner you start implementing these budgeting techniques, faster you will reach your goals.