Being able to budget is an essential part of managing your personal finances. Without knowing the figures it can be very difficult to save money, pay off debt and reach financial independence effectively.
This post will take you through the steps to budget effectively and kick start your financial journey.
What is a Budget
Before you do anything, you need to know what a budget is. A budget is your written plan that helps you manage your money.
It allows you to visualize your income and expenses, thereby determine your level of cash flow on hand.
You are also able to see what assets and liabilities you currently have, and allows you to set goals (short and long term) to work towards.
Why should you create a Budget
A budget will help you to effectively see the figures. Whether you want to save for a holiday, buy a house or car, or achieve financial independence a budget is vital.
We all like to be able to see our progress, it provides the motivation to keep going and achieve our goals. A budget does exactly that!
By seeing all your income and expenses you will be able to move things around and make changes to where your money is going. This will allow you to see in the best possible way for you to save money money.
What to do before you create a Budget
There are a couple of things you need to know before you start to put your budget together. First, you need to know why you are creating a budget.
Knowing why you need a budget, even writing it down, will help you to focus where your financial effort will be applied. This will make the overall process of budgeting and saving more effective.
Second, you need to know what your income, expenses, assets and liabilities are. Budgets rely on having accurate data, if you don’t know what money you have how can you optimize its use?
Also, I recommend you learn the difference between an asset and a liability, its amazing how people can mix up the two.
You don’t need to be a financial expert
Creating a blog doesn’t need to be hard. You can use a spread sheet or a paper based system.
The important thing to keep in mind is that you need to be able to track your spending and progress toward your financial goals.
I like to use a combination of excel spreadsheet and paper budgeting. On a spreadsheet I keep track of my income and expenses, as well as my investments and progress to achieving all my goals. I use a paper system to keep track of when bills are due and to do money challenges.
You are able to get a copy of my paper budget planner on Gumroad!
Review your budget often
A budget is just an exercise you do the one time and then that it is. It is an organic process that should evolve over time with your financial situation.
As you progress though your financial goals you will find yourself adding elements to your budget to keep track of things. For example, in my budget you would find tabs for individual investments and budget allocations within those investments.
Your goals may change over a 1, 5 or 10 year time frame. You will need to edit where you allocate fund as these change.
Example – My Budget
You will see how my budget is split into several different sections. The most important is the cash flow table. There we have all my expenses lined up on one side and on the other is a list of all my income. The total of my income minus my expenses makes up my cash flow.
On the right side you will see a summary of my assets which also includes my goals for this financial year. The sum of my assets minus my liabilities gives my net worth which is also on the left side of my budget.
This is just a summary of my budget, the whole thing includes long term planning, month by month breakdown for a whole year and investment tracking.