Having a budget is essential for one’s financial success. You may think of a budget like it’s the boogeyman of your financial life, but actually it has a simple purpose — to help you spend less than you earn.
The entire process of creating a budget to suit your personality and lifestyle and then sticking to it doesn’t have to be something you dread. In case you don’t know where to start or where you’re making mistakes with your budget, you can take a look at these tips we put together.
Track your expenses
You have no way of controlling your expenses if you don’t know how much you are spending. Make a list of absolutely everything you spend your money on. You can do it the classical way, with a pen and paper, or you can go digital and use a smartphone app.
To begin with, write down all expenses for a month. That means really everything, from rent or mortgage, to your morning coffee or special things like a new shaker for cocktails. If money leaves your pocket or your bank account, you write it down. It might seem boring, but it will help you see the big picture and where your money goes.
Know how much you actually earn
Not only you have to know precisely where each dollar goes, but you ought to know how much money you bring home every month, as well. The correct amount you have at your disposal for budgeting isn’t really your annual salary divided by twelve.
There is income tax to pay and other costs you are probably paying up front for, like health insurance for example. Make sure you know the exact amount you are bringing home at the end of the month and then you can start creating a budget that works for you.
Have a goal
You have to know why you are budgeting. If it’s just because your best friend does so, it might not help you very much. You need to have a goal, ideally a long-term one, like financial independence or saving for a house.
If you’re new at this, you can start with smaller, shorter term goals like “I want to save $3000 to go on holiday next year”. Make sure your goal is clear and well-defined.
Everyone is different
When you are planning your budget keep in mind that everyone is different. What works for others might not work for you and it’s important to remember that when budgeting. Don’t blindly follow advice or step-by-step plans you may see in books; adapt everything to suit your personality and lifestyle, and this way you can have a budget that works for you.
If that morning coffee you buy at the coffee shop really makes your day, then don’t give up on it just because you read it isn’t budget-friendly. Find other things to give up on, things that you spend money on, but you don’t really care about.
Know the difference between “need” and “want”
You may think you need that new gadget or that new designer dress, but those are just wants. It’s necessary to make a clear distinction between need and want and know which is which.
You need to eat, you need to wear clothes, you need to have a roof over your head. However, you don’t need to eat take-out every day, you don’t need designer shoes and you certainly don’t need to live in an apartment that’s too big for you. You shouldn’t give up on all the “wants” in your life — just keep the ones that are really important to you.
Keep it real
Don’t imagine you will be a budget guru from the first try. It’s a trial and error process until you find what works best for you. You can associate budgeting with diets – you can’t go from eating double cheeseburgers for lunch daily to eating only salads.
The same thing applies to budgets – you can’t expect to spend 50% less on entertainment beginning with the first month. Take it step by step and make small changes that are not tiresome or frustrating.
Stop comparing yourself to others
If your friends or coworkers have the newest cars or the newest gadgets and eat at restaurants daily, you don’t have to do the same. Constantly comparing yourself to others will not only make you unhappy, but will also make you spend too much money.
Keep your financial goal in mind at all times and only spend money on something that really makes you happy, not just to keep up with the Joneses.
Create a buffer in your budget
Unexpected things happen and because they are unexpected, they are not in your budget. Don’t let these things surprise you anymore and create a special category for unforeseen expenses.
This way you are covered if your car or one of your household appliances breaks down. You will be able to repair the car immediately or quickly replace your broken down washer with a washing machine under 600, if you have a buffer in your budget.
As time passes, your priorities will change, you will change, too, and so will your plans. Don’t be afraid to adapt your budget according to your new goals and priorities.
Maybe you’ve been saving up to buy a house with a big garden somewhere in the countryside, but you have decided to move to a new country instead. Don’t panic, be flexible, embrace change and be prepared to redefine your goals and budget.
Don’t do it alone
Talk to a friend, your spouse or a family member who is on the same financial path as you and make each other stick to your budgets. Having someone to feel accountable to will make you work harder.
Make it fun, look for support whenever you need it, offer your support and always keep your financial goals in mind.