If there is a common theme among every single personal finance blog or advice, it is budgeting. The first thing a budget can do for you is to give you the awareness of where your money is going. Only then, you can start strategizing on how to achieve your financial freedom. It’s a step-by-step process. Although making a budget can seem like a dry and boring process (might even be intimidating to some), it really builds the foundation of your relationship with money. The prerequisite is that you have to be entirely honest with your income and spending. No more “sweeping it under the rug”. If you can do that, the rest will certainly fall into place. With that said, here are 5 easy ways to start budgeting.
1. Determine your monthly income
Step one is to identify the amount of money coming in. That includes your job, bonuses, government aids (stimulus checks), affiliate earnings, business income, and all the side hustles you have. Then with this number, you have to minus off the estimated taxes. After all, we’re only allowed to spend our net income. If your income fluctuates more than usual, try approaching it by paying yourself a “salary”. This means that you’ll be basing your planning and budgeting around this number, any extra money that comes in will be saved to cover a bad month later. Make sure not to set this salary amount too high or too low as it may put your budget in jeopardy.
2. Create a plan with a goal in mind
Budgeting alone is not going to keep you going for the long term. You need a goal to strive towards, both short-term and long-term. It can be anything from going for a road trip, starting your business, saving for your children’s education, to living debt-free. This goal has to mean something to you emotionally. Be sure to separate short-term and long-term goals. Short-term goals (buying a new computer, home improvements) help you stay motivated as you get to reap the rewards quickly while long-term goals (retirement fund, buying a house) can help upgrade your life. Be realistic with it and keep it simple.
It may seem a little silly thinking about these goals but research has shown that having them makes a person more likely to achieve them. These goals are what gets us out of bed every morning and gives us a reason to keep on pushing. Embrace them.
3. Create a budget
Start the budgeting process with the things that you absolutely need to buy every month. For example, groceries. If you’ve never limited your grocery shopping before, aim high first, then analyze and reduce it later. If you want your habit to stick, start small and make gradual progress. Not just a monthly budget, you’ll also need an annual budget where you’ll get the bigger picture of your finances. The reason for this is to allow you to plan some of the costly activities you might have such as your wedding anniversary dinner, birthday parties, or vacations. Being ready for these and having saved up greatly reduces the possibility of not having enough to get by and resorting to taking out a loan. A great way to approach budgeting is through a zero-based budget. Essentially, this concept emphasizes that every dollar you have is assigned a job. Some of it has the job of going into your savings account while some have the job to keep you alive.
4. Reducing your cost
Are there any other alternatives that can reduce your monthly cost?
Look for things that are cheaper but more or less the same as what you’re buying. And cut back on the things that you don’t need. Identify what you want versus what you really need. It can be splitting your Netflix and Spotify account with a friend, changing your cell phone plan to one that has lesser mobile data because there is wifi everywhere anyway, or even switching to a cheaper olive oil brand. You will be surprised at how much it can add up over time. These little margins are the ones that make a huge difference.
5. Check in frequently
The world runs on trillions of different causes and effects, circumstances change, pandemics may happen, the economy may turn bad, our priorities change, our jobs may change, and we may even have children. Similarly, we can’t expect our initial financial plan to work until the end of time. Be sure to check in at least once a month to see whether or not you’re making progress or if it needs some tweaking to ease the pressure on you. Make your budget work for you, not the other way around. And in the meantime, try your best to improve your financial literacy and learn about investing. That’s where you’ll make your money work for you and where exponential growth lies.