The purpose of a budget is gain control of your finances and to reach your goals. This prevents money from controlling you.
Everyone talks about setting or having a budget, but a lot of people don’t know what it is or where to start.
Below I’m going to explain what a budget is and talk about how you can set up a budget. I’m going to tell you strategies that are going to help you make budgeting easier.
Great so let’s start!
What is a budget?
In a basic explanation, a budget is about taking control of your money. Did you know that around 60 percent of Americans do not have $1000 dollars in savings for a rainy day.
Setting a budget is important to avoid living in a bad financial state. A budgeting strategy helps put you in an advantageous position so that you spend less than you earn.
Which means for example if you earn $2000 dollars per a month, you should be aiming to spend under that amount in order to save money.
How to start the budgeting process?
Cash flow is the key to managing a budget, if you figure out how much you are spending each month and on what you are spending your money on, then it becomes easier to manage your finances.
For some people, a budget can be difficult to implement. I usually say if you want to reach your goals there must be sacrifice of either time or effort. Focus on the positives rather than the negatives and trust me, financial freedom is worth it.
For me, the way I keep track of my expenses is to create a list of all my expenses. This list contains things such as my car payments, my mortgage loan, food, lights and water bills and everything else that you can think of. I add them up and take my income minus my expenses and that is what I have left at the end of the month. To improve on this, I see items that can be reduced or removed completely.
There are three types of budgeting methods, which I will discuss below
The Zero-Based Budgeting
This method involves budgeting your income all the way to the last dollar. Every dollar has been allocated with a purpose. So, in the end of the allocations there is no money left over and no money wasted. This method is also used by businesses.
The Cash Envelop Budgeting
This method involves creating categories with envelops. Within these envelops you allocate a certain amount of money each month. So, each category has a cap on how much money you can spend, helping you with your budget.
Percentage based Budgeting
This budgeting method involves separating your money into portions of 50%, 30% and 20%.
For example, you need to allocate 50% to needs, the 30% to wants and the 20% to savings / debt repayment.
This budget gives lots of flexibility and helps you save more because of the 20% savings instead of many budgeting methods which only sets it at 10%.
The importance of Budgeting
Setting a budget does not need to be difficult or complicated. Yes, there will be some sacrifice, however as each month progresses, it will get easier to form a habit and as time passes, you will gain more control over your finances.
Having a budget will help you to reach your goals that you always dream about.