Basics in Budgeting
When you think about budget, you immediately think that you should save as much as you can while minimizing expense to zero if possible. That’s a very idealistic way of thinking and is impossible to achieve. This is because there will always be expenses, major or minor, wherever you are. Living expenses will always be present and unless you’re a hermit, you can’t do away with this. The key to budget is finding the right balance for your income and expenses. Here are some things you need to be aware regarding budgeting and what you can do about them.
Income and Expense
Income is defined as something that puts money in your hands. It can be from any source: your allowance, a regular income, cash gifts, and even assets. There are many kinds of income out there, but as long as it increases your savings account or your net worth, then it’s defined as an income. This is what you’ll be using to pay off your monthly expenses, daily living costs, and what you’ll use for savings or investments.
Next up is expenses. These are opposite to income in the sense that they take money from your account. This can be in the form of utility bills, credit card payments, taxes, meal expenses, and your living costs. From the many types of expenses, the most important for now are fixed expenses. These fixed expenses are your monthly financial obligations. You can’t do away with these; it only fluctuates depending on your usage. Examples of fixed expenses are your rent, utility bills, and tax payments.
Wants and Needs
When mapping out a budget plan for your income and expenses, it’s very important to realize the difference between a need and a want. A need is something that you definitely can’t live without, like education, food, clothing, and shelter. On the other hand, a want is one which you don’t need to survive like, designer clothing, vacations, the latest car, and expensive gadgets out there.
Recognize which among your expenses is a need or a want, then consider reducing it. For example, that designer clothing looks good and is all the rage right now, but you don’t need it to function properly. Even hand-me-downs or clothing items you already have in your closet will do. Once you realize which among your expenses are luxury items can make things easier for you to replace them with something more economical.
As you define which among your expenses are needed and which ones are not, you’re slowly developing your prioritization skills. When you’re faced with important decisions regarding your finances in the future, it’ll be easier to make frugal choices at that time.
Do Your Own Work
A specific area where many people waste a lot of money is in the services you pay for. It feels very nice to have someone clean your house and mow your lawn every once a while. However, if you avail of these services regularly, you could be throwing away money you could have easily saved and used for other purposes. Instead of putting this money into your savings or other investments, you’re wasting it on frivolous expenses. The long-term result is you’ll end up paying for your retirement and investments longer than needed.
While you’re still earning, learn to do your own work and live within your means. You don’t really need to live in a 4-bedroom house if you’re still a bachelor and you’re not planning to settle down soon. Live frugally and use your money instead of something worthwhile like a mutual fund or your 401k plan. When the time comes for you to use that money you won’t be in a panic or in a rush to put money into your retirement funds.
Manage Your Wants
Earlier we talked about separating your needs and wants. It’s impossible to do away with your wants for good. The best that you can do in this situation is to manage it accordingly and make sure that you won’t break the bank every time you choose to “reward” yourself.
It’s a part of our human nature that we’re not satisfied with what we have and we always desire something much better and more expensive than what we have now. For example, you think that you want a faster internet subscription so you try out different internet service providers until you found the right match for your wants. That’s okay and understandable, but if you’re just using that to check your emails and some minor browsing, then that’s definitely a waste of money. This holds true for many other subscriptions or purchases out there.
To manage your wants effectively, set limits to your luxury purchases before you even step into a store. Think about how much you can spend on an item and the space in your home. It won’t make sense if you buy a trampoline, but you don’t even have a backyard to place it. It’s even a good idea to include your luxury expenses in your savings allocation. Set aside a sizable portion of your paycheck for these purchases. It’ll give you time to think if you really want it and you won’t be burdened too much when you do buy it.
Set Realistic Goals
Part of creating your budget is to also make your short-term and long-term goals. These will guide your savings and will motivate you when you’re not sure if you feel tired with all the savings and budgeting. Short-term goals could include that gadget you’ve been eyeing for some time or a new TV set. For long-term goals, it can be your emergency savings, or your retirement plan.
Whatever your goals may be, give yourself a realistic time frame when you want to finish it. Consider your current budget and how much you can set aside for these goals. If you choose a shorter time frame to spur yourself then it might backfire as you frantically save and you might even end up sacrificing your other savings just to make that purchase. Give yourself ample time to save for that goal and stick with your budget accordingly.
Each time you make a mistake with your budgeting or spend too much, don’t just throw the towel in and call it a day. Everyone makes mistakes, and you are no exception. Especially when it comes to personal finances, it doesn’t come easy or naturally for everyone. Take time to assess your mistakes and learn from it. It doesn’t matter that you have a clean record or you are able to follow your budget to the dot. In fact, it’s better to make financial mistakes when you’re still starting out so you won’t make them again when you are already handling big investments or huge amounts of money.
These tips regarding basic budgeting can be applied to most situations whether rich or poor. The only thing that matters is you have a serious mindset about managing your money and you’re thinking about the future.