Money involves more than just making ends meet. The way you spend your money impacts your credit score and the debts you may end up with. And as we know it, being able to manage finances can be challenging. That’s why you need to create and follow a budget. Budgeting is an effective way to help you spend your money the right way, by giving you a chance to plan ahead of time, pay off debts, save for the future and even have extra money for fun.
Key Reason Why You Should Do Budgeting
According to a recent survey, up to 67% of Americans aren’t aware of how much they spent last year. And the reason most gave was that they simply didn’t want to find out how much they’d spent. Usually, people get so surprised when they start budgeting because they realize how much of their money has for long been wasted on unnecessary things like going to the restaurant, online shopping, and buying things you don’t need. Due to such spending patterns, many people continue to struggle to make ends meet and are forever trapped in a vicious cycle of not being able to save or get out of debt. Having a Budget and sticking to it will have an immediate and profound impact on your personal finances. You will notice that within months of implementing and following a budget, your overall debt is reducing, and your Savings are improving.
5 Key things to do for effective Budgeting:
1. Set out your financial goals
At the beginning of your Budgeting journey, planning out your financial life can be challenging but it will help you break the habit of spending on frivolous purchases. Setting out financial goals helps you get motivated to save. Find the time and write out your specific, long-term financial goals. This includes things you plan to purchase, trips you will take, buying a new property, and your retirement plans. Your goals will affect how you plan your finances and create your budgets. Achieving these goals will depend on how well you save your money otherwise you will not be able to achieve these goals. If you are married or have a partner, you both need to work together to identify your short-term and long-term financial goals. This is really a team effort where both of you need to be on the same page with clear goals and mutual understanding.
2. Understand your current financial situation
Knowing your current financial situation is a key part of creating a budget. Research your past transactions and create a list of bills that you pay each month, identify how much you spend on food, track receipts of services you subscribe to, and find how much you owe in debts. Identify categories of major expenses which include rent, electricity, water, and transport to and from work, child support, internet, phone, food, health insurance, and debt payments. Also include categories of things you can go without. These are usually wants rather than needs. They include clothing, cable TV, streaming subscriptions, eating out, and home décor among other things. You can then assign monetary values to these categories. This exercise will help you come up with the Budgets for each category indicating how much you think you must spend in each category every month.
3. Create and stick to your Budget plan
Earlier, you have created categories for your major expenses, you can then add the categories you have identified to come up with your monthly budget, and then compare it with your monthly income. If your monthly budget is lower than your monthly income, bravo! You have done a great job, but if your budgeted money is more than your income, then you need to do adjustments to your monthly budget and identify categories where you can cut down spending. Keep in mind that it is not just having a lower spending budget than your income, but actually having the budgets low enough so that you have enough money left to actually save and invest your money. In fact, many budgeting gurus recommend that you create a category for Savings and Investments as part of your overall monthly Budget. Creating a Budget is the easy part but sticking to it requires lots of discipline and self-motivation which you will have to channel if you really want to achieve your financial goals.
4. Track your expenses on a regular basis
It’s extremely important to keep track of your spending. A penny less and a penny more, all make a huge difference, so remove all unnecessary expenses otherwise they will continue to impact your finances. You need to track your spending on a regular basis, and you should stop when you reach the monetary limits that you have created for every category. Do this as often as possible, say every week or every month to keep tabs on your spending habits. That way you can update your budgets as you pay bills and see what and how your expenses have been performing. When you’re aware of how much you are spending, it will be easier for you to act without going over the budget. Of course, there will be months where you will end up spending more due to unforeseen circumstances, but you can try to stay well within the budget for the next month, to cover for the overspending that occurred in the previous month.
5. Use a budgeting app such as MoneyPatrol
There are several budgeting apps that can help you keep track of your expenses. An app like MoneyPatrol will help you easily create monthly and annual budgets by simplifying many of the complex tasks. MoneyPatrol easily tracks transactions from linked financial accounts, will automatically categorize these transactions, and will also send you email alerts when you go over budget. You can use MoneyPatrol for yourself or with your spouse or partner to easily take control of your Budgeting and Personal Money Management. While some Budgeting apps may have a monthly fee, it is well worth thinking of this as an investment because the financial impact of using such apps will be an absolute positive for your financial life.
To summarize, budgeting will help you stay on track with your personal finances and help you gain control of your spending. But, it is absolutely important that you will have to stay disciplined by staying within your budgets. Taking control of your finances will require you to completely change your financial lifestyle and incorporate new habits like creating a budget that you can stick to, tracking your expenses, setting financial goals, getting rid of unnecessary expenses, and paying off your debts. All of these will require time, discipline, and commitment. If you’ve been moving back and forth with managing your finances and nothing has worked for you, then we highly recommend that you try budgeting using MoneyPatrol.