Tracking what comes in and what goes out, and then organizing it all, allows you to fine-tune your spending in order to save more, decrease debt, and live within your limits. I will outline an easy yet powerful approach to budgeting that involves a few key phases:
1. Track your Income and Expenses
The initial phase of budget planning involves monitoring your earnings and costs for a period of time, like a month or week. You can use a spreadsheet, app, or notebook to log every transaction. Carefully tracking your ins and outs provides insight into the sources and destinations of your funds.
2. Categorize and Allocate
Categorizing income and expenses allows you to see how stable your earnings are and where your money tends to go each month. Allocating your income is the final step in setting up your budget and involves assigning the dollars you bring to your business – or home – to specific spending categories.
Tip: Focus on needs: One of the key principles of budgeting is to prioritize your needs over your wants. Needs are those things that are essential for your survival and well-being, such as food, shelter, health care, etc. Wants are those things that are nice to have but not necessary, such as hobbies, vacations, gadgets, etc.
It can help to use a technique. There are many different budgeting techniques, but some of the most popular include:
- 50/30/20 budget: This budget allocates 50% of your income to needs, such as housing, food, and transportation, 30% to wants, such as entertainment and dining out, and 20% to savings and debt payments.
- Envelope system: This system suggests allocating cash to different categories in separate envelopes. Once you have spent all the money in an envelope for a category, you cannot spend any more money on that category until the next month.
- Pay yourself first: This budget involves setting aside a certain amount of money for savings or debt payments each payday before you pay any other bills. This can help you to make saving money a priority.
Tip: Set aside savings: It’s advantageous to save some of your income periodically. You can consider automating your savings by setting up automatic transfers from your checking account to a savings account. Most banks allow you to schedule recurring transfers online or through their mobile app.
3. Be Consistent
Maintaining a budget requires diligence over time. As your life changes, so too must your financial planning. Review spending and income regularly to ensure your budget stays in step with reality. And remember:
Tracking expenses is key – it reveals where the money goes. Catching unnecessary drains early allows for redirecting funds and making the best decisions.
Goals give purpose and motivation. When you set clear objectives, your decisions feel purposeful. Vague goals might leave you adrift. If you feel your motivation slipping, consider streamlining your goals or partnering with an accountability partner.