We all have dreams. Your dreams might be living an existence of financial independence, to own your own home, buy a new car or RV, live more frugally or maybe you just want to get out of debt. It doesn't matter what your financial dreams and goals are but it is important to sit down and create a budget!
Why should you create a budget
There are quite a few benefits that can be gained from creating a budget. And all of them can help you on your road to financial freedom.
1. A budget will give you a clear picture of what you are spending each week and month. When you create a budget, you will be able to quickly see where your money is going. Are you spending most of your spare money at a convenience store buying lottery tickets hoping to win the lottery? Is your paycheck primarily going to buy new clothes, go to the movies, or for eating out? A budget will allow you to see any potential issues with your spending. For example, are you buying a cart full of groceries each week but then eating at restaurants for every meal? That could be a problem with your financial expenses. A budget will allow you to look at your expenses and see any trouble spots; like that overpayment of groceries that ends up sitting unused and eventually thrown away because you opt to eat out each day. A good budget will help you find items that may be wasteful or unnecessary.
2. A budget will allow you to stay focused on the end goal. For the person that is desperately wanting to buy a new house and is saving for the down payment , a budget will keep them on track. If your end goal is financial independence, a budget will allow you to continually fine tune your expenses so that you know exactly how much you have to be earning from all channels of income before you can leave you 9-5 job. A budget will keep you on track and focused on your eventual success.
3. Having a budget is a perfect way to make sure that you do not overspend your income. This is for me the most important reason that I have a budget. Sure, I want to reach my financial goals to buy a house, live financially free and be my own boss. But a budget for me is a way to ensure that what I am spending each week does not exceed my income. I am trying to save money and to live fiscally responsible. A budget allows me to know exactly what I have to spend each week. I know how much I have to spend toward groceries, toward eating out and toward fun and entertainment. Knowing how much I have available for those things in my life gives me the knowledge and power to control my spending. It keeps me from going into debt or dipping into my savings, two things that I want to avoid if at all possible, because neither one of those brings me closer to my end goals.
4. A budget will help you plan for emergencies. Life is going to happen. You are going to have that day when your car breaks down or you need to spend money on some large purchase. For me just the other week it was my laptop. It decided to give out on me. I certainly didn't want to spend the money on a new laptop, but I had no choice. Luckily for me, my budget allows for emergencies. I have put money aside for such occasions. Admittedly, I wasn't happy to pull that money out of my savings account but I had it there for when I needed it! No-one can predict when such an emergency will occur. But we can control the outcome by having an emergency fund built into your budget.
How do you create a Budget
research-your-financial-freedom.htmlFor me the first step to creating a budget was with the process of diligently tracking my expenses for a few weeks. Before I could create a budget that would work for my lifestyle and within the constraints of my income I had to find out where I was spending my money. I did this the good old fashioned way. I wrote down every expense on a piece of paper.
Find your set monthly expenses when creating a budget
After you have a good month or two of your expenses you can start to really dive into the expenses and categorize them. The first thing you want to extract from the list is the monthly expenses that stay the same (or very close to the same) each month. This will typically be your rent/mortgage, phone bill, internet, cable tv, electric, water, garbage. List them out and add them up. These are your non-negotiable items.
The total dollar amount of these items needs to be deducted from your monthly income before any other items can be deducted.
After you have your monthly bills deducted from your income, you will see how much money you have or incidental expenses. Incidental expenses are things like groceries, eating out, entertainment, clothes, etc. This is where budgeting money gets fun!
Decide what is important to you when creating a budget
Once you have deducted all of your monthly expenses, you should have a dollar amount of what is left for these incidental expenses. This dollar amount is what is left over after all of your bills and basic necessities have been paid. This is where you get to decide what is important to you. I call this the additional or extra budget. This is more negotiable and subject to change as my lifestyle adjusts and adapts to what is happening in the world and in my life. This is when you will decide what you are going to spend your extra money on. Will you spend $500 on eating eat each month or will you spend $200 on groceries and eat at home instead.
Start with the most important 'extra' item on the list. For us, that is groceries, but for you it may be something else. Refer back to your list of expenses that you started at the beginning of this month. You can easily calculate how much you spend on that item. List that item on your budget with the total dollar amount that you spend/plan to spend each month. Deduct that amount from the dollar amount that is left from your income.
If you still have money left from your income after you deduct that last planned budget item then you can refer back to your expenses list and find the next most important thing and calculate how much you spend/want to spend each month. Add that item to your budget list and deduct that from your income. Continue doing this until you have everything you find important listed and accounted for or until you have no more income left. Make sure that if building a savings account is important to you that you include savings as one of your line items. I would highly recommend a savings and an emergency fund, because life does happen and it's not always how we plan.
I have created a sample budget to show how a budget can work. I built my budget based on a $3000.00 monthly income. These figures are fictional, but can show exactly how a budget works.
In this sample budget I have listed $1700.00 in monthly bills. I will deduct that from my $3000 monthly income. That will leave me with $1300.00 for my incidental/extra expenses. So lets see a sample budget for these additional expenses
As you can see, I have included a basic savings account that I personally use for those big items such as a down payment on a car or a house. And as that amount grows larger, it becomes savings for my future and retirement. As I spoke about earlier, I added an emergency fund and a vacation fund. I personally like to keep these funds separate. A vacation isn't an emergency and I don't want to wipe out my complete savings to go on vacation. An emergency could happen to you the day after you get home or three weeks later as was the case for me one year. You see, we went on vacation and three weeks later my car died with no notice and totally unplanned. I had to buy a new car. Most recently, we went away for a long weekend and the day I got back my laptop died necessitating the purchase of a new laptop. Thank heavens for an emergency fund! You will see other line items that are self explanatory. But maybe you don't know what I mean when I say incidental fund. I like to include an incidental fund. There will be the day that you forget your lunch and have to pick up a lunch at a restaurant or any number of unexpected expenses. A budget needs to have the freedom to live a little. However, for me that incidental fund becomes a challenge to see how much I can save from my incidental funds. If I want a big item that isn't included in my budget, I try to save every penny from my incidental fund until I have enough to purchase that wanted item.
Creating a budget doesn't mean never buying new clothes or going out to eat. It doesn't mean denying yourself the luxuries of life that you really enjoy. Creating a budget is a way to make sure that you have the money for what truly is important to you. It gives you the roadmap to financial freedom.
Write something about yourself. No need to be fancy, just an overview.