The majority of us have financial goals for the future. This can include the likes of buying our first home, getting a new car, going on the vacation of a lifetime and much more. While the majority of us will know that budgeting is the most efficient way of doing this, many may not know how to budget effectively. However, there are a few simple steps to setting a budget that works for you. While being easy to follow, that doesn’t mean that they’re not significant steps in making your financial goals a reality. In contrast, many experts have noted that they can often be one of the few ways to do so.
Creating a budget can often be the first step in many people’s financial journeys. Furthermore, your budget can often be something that’s significantly affected by the goals that you’re aiming for. For example, there can be quite a difference in budgeting for a new car and budgeting for your first home. There’s also the likes of debt reduction, which can play a significant role in your overall budget. As such, crafting a budget can be quite a personal process, although there are a few things that can be done no matter what your circumstances are.
While the likes of a loan may also be a quick and easy way to purchase any of the above, this is still something that you’ll need to budget for. This is primarily because you’ll need to factor in the repayments that you’ll have to make in the future. As significant as a budget is, setting one doesn’t need to be difficult. In contrast, it can be relatively easy once you follow a few notable steps.
Calculate Income & Expenses
This is one of the first things that everyone should consider when they’re setting a budget, as it has a significant impact on every other aspect of your budget. Your income can often be relatively easy to determine; after all, you may simply need to consult your payslips from work to see how much you’re earning. However, it’s worth noting that you ensure you’ve deducted any taxes to ensure you’re getting an accurate representation of what you’re earning. Your partner’s income should also form a part of this, where applicable. Aside from the salary you receive from your job, you should add any other income that you may be generating. This includes the likes of alimony, child support, interest, dividends and rental income.
Your expenses can be somewhat trickier to determine, as many can vary somewhat from month to month. Because of this, many financial experts have suggested adding up your expenses from the past six to 12 months and then dividing by the amount of months. This will give you your average expenses, which should help you significantly when you’re setting out your budget. It’s best to be thorough when adding up your expenses, as any forgotten bills can throw your financial planning into disarray.
While many of your bills will be expected well in advance, there’s also the issue of unexpected bills that may arise in the future. Because of this, many experts have noted that you should put extra money aside for these. As a rule of thumb, many have suggested adding an extra 10% to 15% of your expenses aside to ensure that these are covered. Once this has been done, you’ll be able to figure out how much money you may have to spare for your future goals.
Once you have your expenses and income figured out, you’ll now be able to set your savings goals. This can have quite a significant effect on your overall budget as it will then allow you to figure out how much money you’ll be able to put aside every month for your savings. This will also be something that has an impact on how much debt you’ll be able to pay off every month, should you have any. Should you determine that you’re earning less than you’re spending, then you’ll be able to figure out how much you’ll need to cut back on to reduce this amount.
This will help to give you a clear picture of your overall finances, which is arguably the most important aspect of setting a budget. By setting goals, you’ll then be able to determine if you need to cut back on your expenses even further. While cutting down on larger expenses can make quite an impact, what many people may not realize is that reducing the amount of smaller expenses can also make quite a considerable impact. For example, spending even $10 a week on coffee can add up to $520 over a year. Because of that, cutting down by that amount in a few different areas can quickly add up to a significant amount of money.
Track Your Spending & Progress
Setting a budget is no good unless you stick to it. Because of that, you should track your income and expenses every month to ensure that you’re sticking as closely as possible to your budget. This will also have the added benefit of minimizing the amount of money you spend on splurges, as you’ll begin to think twice before spending a considerable amount of money. While the occasional purchase may not seem like something major, it can add up over the course of a year.
With your savings goals, you may be able to set aside a certain amount of money every month for these kinds of purchases. Outside of this, however, you should always ensure that you’re sticking to the budget closely. By doing so, you’re more likely to reach your savings and debt reduction goals in the timeframe that you’ve planned. It also means that there shouldn’t be any shortfalls in your budget as time goes on.
Be Realistic & Flexible
While sticking as closely as possible to a budget is vital, it can be just as crucial to be realistic as time progresses. This is primarily because there may be a variety of different expense that comes up that you may not have planned for. This can also mean that you should be realistic in planning your budget, which is why many experts have suggested that you put aside a certain amount of money for these bills every month. As such, it’s also been noted that you should be somewhat flexible over time.
There’s also the fact that your income should also improve over time as your career progresses. While this may not be something that you can budget for, it can have quite an impact on your budget over the long-term. This can mean that your budget loosens up over time.
By following each of the above steps, you’ll be able to create a budget that works for you. While saving up for certain financial goals may take a considerable amount of time depending on what they are, you should be able to set a budget that works toward this. This can be done regardless of the level of debt that you might have. In fact, the steps above can be an effective way of reducing your debt over time.
However, it should be noted that this length of time can vary drastically depending on what your goals are, as well as the level of debt you might have. For example, paying off a car loan will naturally be much quicker than paying back a mortgage. With each of the steps and tips that we’ve mentioned, however, you should have no problem working toward these goals.