Creating a sound budget is a prerequisite for every great financial plan. Budgeting is the most effective tool for managing your finances. However, most people avoid creating a budget because they view it as additional work.
A reasonable budget will help you manage your finances. Through the use of a budget, you will be able to organize your spending. A budget allows you to divide your money into different categories of expenditures and savings thus enabling you to know which group of expenses takes a large portion of your money. As such, it will be easy to adjust your spending where necessary.
The success of different financial plans such as a settlement of debts, saving for a vacation or purchase of property depends on the existence of a sound budget. What budgeting does here is that it helps you focus on your plans rather than making unnecessary spending. Below are some of the steps that will help you to create a sound budget.
1. Calculate Expenses
Before moving to other steps of budget creation you first need to find out your monthly expenditure. To achieve this goal you have to gather sufficient information regarding your expenses. You can do this by checking your bank statement, bills, receipt, and financial files. Since most expenses such as insurance payments are intermittent, you will have to calculate an average expenditure of six months to get an accurate financial picture.
Add up all the expenses for the last six months and divide these expenses by the number of the month, which will provide you with an average monthly expense. Remember, you have to be thorough when adding up your costs to come up with a realistic budget. An excellent rule of thumb is to include an extra 10 per cent to your expense to factor in unexpected expenditure.
2. Determine your Income
Once you have figured out your monthly spending, you can now determine your income. To get an accurate amount of your income, you have to make a record of all your sources of income. Also, if you have any outside sources of income or extra funds that you occasionally receive throughout the year such as gifts, then you have to include them as well.
If your income is in the form of a regular salary that is subject to tax deductions, then you can record the net income as a monthly amount. Generally, you should include everything: child tax benefits, child maintenance and spousal support, commissions, pension and other sources of regular income.
3. Set Your Savings Goals
To come up with a realistic savings goal, you have to find out whether you have a budget shortfall or overage. To achieve this result, you need to subtract all your expenses from your monthly income. If the results show that you are making more cash inflows than cash outflows, then you can mark the overage for saving purposes.
However, if you find out that you are spending more money than what you are making, then it is time to do some expense cutting so that you can get something to save. Some of the effective ways that can help you cut your expenses include downsizing your home and phone services. Ideally, you should reduce costs that often results from things that you do not need. Cut enough so you can have over 10 per cent of your income left over every month for saving.
4. Create a Sound Budget
Once you have set your savings goals, enter all the information regarding your monthly income and expenses into a worksheet or a database. If in case you had a budget shortfall, our previous step of setting savings goals will help you make the necessary adjustment through expense cutting so that you can have some money left for your savings account.
However, if you had a budget overage, you can enter the information from the first two step in a database. By recording this information in a database or worksheet, you would have created a sound budget that will help you know how much you can spend, earn and save in a month. You also need to keep track of your budget to ensure that all your expenses are within your budget.
If you have never thought of creating a sound budget, it is time to design one. By following the above four simple steps, you will be able to prepare a budget that will help you manage your finances and build wealth for your future. Most importantly, a budget will help you take complete control over your money. You can only control your cash if you know the amount that you can spend and still manage to stay afloat.
Also, you will reap the benefits of a budget only if you can stick to it. Therefore, it is essential to be disciplined and stay true to your budget in order to achieve your financial goals.