Although budgeting is not always fun, it’s necessary. Here are 10 simple tips to make your budgeting more effective.
A budget is a spending plan which helps you understand your true financial position. Its most simple function is to give you an insight into whether or not you can afford the lifestyle you enjoy. Simply put, budgeting is breaking down your income vs expenses. Planning your expenditure helps you prioritise and manage your money better regardless of how much you earn. Budgets eliminate wasteful expenditure and are essential in helping you achieve your financial goals. A lot of people assume that budgeting is a task that should be left to people who are not responsible with money. This is simply not true - even the rich must budget.
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One of the best and most obvious advantages of a budget is that you get to save. Well, what happens if you already save? A budget could still help you pay more attention to your money. Perception is not reality and a lot of people are surprised to learn that they spend way more than they realise. Budgeting gives you the facts and helps you understand how much you really earn and how much of your income goes to your expenditures. By having a review of your income, you can plan your expenses and learn to make wiser spending decisions. It also gives you greater awareness on what kind of a spender you are and this could see you stop habits such as impulsive buying. The more time you spend analysing your money, the better spending choices you make. You are able to save better and invest. As you can see, budgeting is for everyone. Budgets keep you prepared for emergencies and they are a must-have regardless of how much you earn.
Top ten budget tips
Budgeting is all about personal financial growth. If you wish to grow financially, you need to focus on saving. That said, saving is not easy and it requires great discipline especially if you have never had a budget before. Being disciplined requires a system. In this case, it helps to have a system in place that helps you set aside some money each month before you plan for your expenses. You should set up an an individual savings account or have a direct deposit order directing money into your mutual fund. The plan is to religiously set aside some money each month.
Review your spending habits
Reviewing your spending habits can help you identify leaks or areas where most of your money is spent. While it’s easy to say that you must cut bad habits, we all know that bad habits, such as excessive shopping, smoking and drinking, are the hardest to shop. Instead, we recommend that you have a budget for your so-called ‘bad habit’. You can create an entertainment allowance in your budget, which will give you an idea of exactly how much you can spend on clothes or nights out. This way, you still get to enjoy your guilty pleasure while still saving. It’s a win-win situation.
Get a budgeting buddy
Budgeting is easier when you have a support system. It could be your partner, friend, family member, a financial coach, or even someone who is struggling with budgeting just like you. The support helps you stay on track especially if you are fighting with an addiction to bad spending habits or need to clear debts. We all need a helping hand once in a while and you shouldn’t have to take on the entire burden on your own. You can also hold regular meetings where you sit down to review your finances as you analyse progress and encourage each other.
Get an app
Let’s face it, budgeting can be boring and no one enjoys calculating how much they spend each month or going through receipts. The good news is that you don’t have to do it all on your own. Technology is making life easier and there are countless budgeting apps that can help you keep track of your expenditure and even analyse your finances. With an app, all you have to do is key in your expenses of the day and the rest will be handled by the app. At the end of the month, you can review your expenses and even get tips on how to improve on your finances. Some apps like Pocketbook will even do many of these processes for you automatically.
One of the easiest ways to stay on track with your budget is to use cash. Have a certain amount of money set aside for every week and withdraw cash that will take you through the entire week. Why does this method work? You know exactly how much you have for the week that will cover your food, gas and other expenses. The cash system automatically sticks to your mind. For example if you come across a gorgeous pair of shoes worth $150, you immediately know that you cannot afford it since that means you will have less than $150 for the week. Keep your credit cards for emergencies. Walk with cash.
Keep your receipt
Keeping your receipts helps give you the real picture of exactly how much you spend. Stepping out of your budget is one of the most tempting things in life. Receipts can help you understand your spending and eventually cut back. Using your receipts, jot down the major places where you spend your money and begin to look for more cost effective alternatives. If, for example, most of your receipts are from restaurants, you could consider cooking as opposed to eating out. You are less likely to overspend and deviate from your budget when you realise your spending habits.
Balance your chequebook
If you are new to balancing your chequebook, don’t despair. Not many people actually know how to balance their chequebooks. But it is not rocket science and you can ask your bank officer to teach you or simply Google it. The first thing you need to do is register each and every check you write. If this seems like a lot of work, you can request for carbon copy checks. Balancing your chequebook helps you avoid overdraft or bouncing checks. Ensure that your register is well written with statements such as service charges, bank fees, etc.
Now, this may come as a surprise since you are trying to save and keep a budget. However, you need to pay yourself for all the hard work that you do. Create a special account for yourself that is money just for you and you can do whatever you like. This should be a certain percentage of your income. Set aside 10% of your income in a separate account and go ahead to plan the rest. This is another way to save. And if you were to combine the ‘pay yourself account’ with your savings, you will come to realise that you actually have a lot of money set aside for holidays and personal treats.
Be realistic with budgeting
Have you ever met people who have unrealistic weight loss goals? Well, the same thing happens all the time with budgeting. It’s not going to work unless it’s well planned out. Just like a diet, your budget might seem all good in the beginning but very soon you’ll start piling all the weight/debt back on. Why? You might have set unrealistic goals. Cutting your spending by 80% is simply not going to work in the long run. You also cannot set a budget that takes 50% of your earnings to your savings account. You will not have enough to get you through the month or even a week. Set realistic financial goals and align your budget to these goals.
If you are new to budgeting, you’ll soon realise that a lot of what you have in your budget is either not realistic or not factual. You may have misquoted how much you spend or set a budget that is unattainable. Don’t panic—it’s okay to make amendments. This is not cheating. In fact, it happens to everyone of us. Your budget needs to evolve and sometimes it may need some tweaking. This doesn’t mean that you crash and burn. It just means that you may need some practice and time to get the right budget for you.
A budget shouldn’t be viewed as a necessary evil. While it’s not the easiest thing in the world, it leads to financial freedom and this is a beautiful and powerful feeling. If you haven’t already created a budget, start now. You don’t even need to know how to create a ‘smart’ budget since there are plenty of budgeting apps you can use for free. However, it helps to write down your financial goals or at least have them somewhere at the back of your mind.
It goes without saying that budgeting is important and it applies to all of us regardless of our financial status or spending habits. The above steps should help you have an easier time budgeting, which eventually lead to financial freedom. Remember that failing to plan is planning to fail.