I will share with you some tips one can keep in mind while making a personal or household budget.
What is Budgeting?
Budgeting is the amount of money or resources set aside for a particular activity or time-frame.
A personal budget or home budget is a finance plan that allocates future personal income towards expenses, savings and debt repayment.
Past spending and personal debt are considered when creating a personal budget.
There are several methods and tools available for creating, using and adjusting a personal budget.
A budget allocates or distributes expected income to expected expenses and intended savings.
Budget can be made using a variety of tools like – Pencil and paper, Spreadsheet software, Money-management software, Money-management websites and Spending-management software.
Once a budget is constructed and the proper amounts are allocated to their proper categories, Then the main thing is following the budget, there are various methods available for following a budget.
1. Envelope Account
Envelope Accounting or the Envelope System is a method of budgeting where on a regular basis (i.e. monthly, biweekly, etc.) a certain amount of money is set aside for a specific purpose, or category, in an envelope marked for that purpose.
If the money is there, all is well.
Then anytime you make a purchase you look in the envelope for the type of purchase being considered to see if there are sufficient funds to make the purchase.
Otherwise, you have three options:
- you do not make the purchase
- you wait until you can allocate more money to that envelope
- you sacrifice another category by moving money from its associated envelope. The flip side is true as well, if you do not spend everything in the envelope this month then the next allocation adds to what is already there resulting in more money for the next month.
2. Spending Book
A spending book is a written accounting of your money spent.
If you want to create a budget and save more money, you first have to know how you are spending all your money.
Most people don’t overspend at Gamble and Casinos. Instead, they fritter away huge sums of money every year on purchases and experiences.
This is the reason why financial writers are constantly talking about why you shouldn’t buy bottled water or readymade Coffee.
Those impulse purchases make huge holes in a budget.
A spending book helps save money in two ways.
- First, it gives you a detailed, down to the penny, view of your spending habits.
- Secondly, like writing a check, it makes parting with your earnings that much more painful.
3. Go Cash Only
In this method, we just use cash which is taken out of bank once a month, people make a cash withdrawal of a portion of their paycheck to use for discretionary spending.
That way, when the cash is gone, you know you’ve used up all your spending money, Once this money is spent, you know you need to cut down or look at cheaper methods to buy stuff.
4. Have seperate bank accounts
It would help to keep atleast 3 separate accounts, one for fixed monthly expenses, one for annual expenses like life insurance, summer camp or vacations and one for emergencies.
The major advantage of this system is that you can work out how much of your paycheck is already committed before the non-monthly expenses happen like you can decide in advance how much of your check you can devote to friend’s weddings or kid’s Birthday Party this year.
Then when it comes time to plan the event you know your budget and can say no thank you or adjust to fit what you can afford!
6. Learn to make things instead of buying them
One of the ways to save money is to simply learn how to do and make more things that you would normally spend money on.
Like you can make DIY cleaning supplies, bug repellents and even bake your own bread and grow your own vegetables.
If possible, there is also another way by making instead of buying gifts, these type of gifts are better appreciated too.
7. Have A Goal
Having a goal is one of the best ways to save, Start by thinking of what you might want to save for,
Then figure out how much money you’ll need and how long it might take you to save it.
perhaps you’re getting married, planning a vacation or saving for retirement.Then figure out how much money you’ll need and how long it might take you to save it.
8. The 50 / 30 / 20 Budget
This budget is a simplified plan in which you break down your expenses into three categories,
Needs, wants, and savings!
50 percent of your take-home pay should go towards needs, 30 percent should be devoted to wants, and 20 percent should get put into savings.
Needs are your only vital necessities.
Most groceries are a need, but there are items in our grocery lists that are wants like – rice and flour are needs, chocolate cookies are wants.
9. 80 / 20 Budget
The 80/20 Budget is simpler than the 50/30/20.
Under this strategy, Twenty percent is the minimum you should save.
From this amount.. you should put at least 10-15 percent away for retirement.
You can use the rest for emergencies, buying your next car in cash, home repairs, and other long-term savings goals.
You can also change this into the 70/30 budget, 60/40 budget, or even the 50/50 budget, depending on how much or how fast you want your savings to grow.
This is also known as the Pay Yourself First budgeting method.
10. Use Budgeting Tools & Apps
There are a few apps in market for easy budgeting, like Mint, Pocket guard, good budget – lots more available free online where one can check whats suitable and try!
The Pitfalls In Budgetting
Pitfalls to watch out for are as below,
- Have a goal in mind
- Know the future expenses
- Do not get too harsh on entertainment & personal expenses
- Plan for the unexpected
- Track your spending & review it regularly
- Adjust and update budget accordingly regularly
Some Budgetting Tips
1. Budget with a friend or partner:If married you can plan with your spouse need to get on the same page about money. It’s no longer your money or my money—it’s our money.And if you’re single, find a friend who can be your partner and help you stick to your goals!
2. Every month’s budget is different: Some months you’ll have to plan for things like education or routine car maintenance or sometimes you’ll be saving for things like vacations, birthdays and holidays. Regardless of the occasion, make sure you plan for those expenses in the budget so you are well prepared when time comes. Be sure to adjust your budget each month as per needs . Make a savings fund which you can depend on when in time of need .
3. Prioritise: First come – food , rent/mortgage , Bills /utilities , Transportation- once this is settled , you can start to set money for other stuff
4. Pay back loans ASAP: Paying off loans should be first thing you need to take care of, after basics , make a plan to slowly pay back all loans
5. You will need to cut off some things from budget: Somethings maybe those which you dont want to, like eating out, shopping for those branded clothes, but keep in mind that these cut offs are temporary, after your goals are achieved you can go back to some of these.
A Guide To Spending
Spending plans are being used since ages. The ideal spending plan should room for the general messiness of being human and the weird stuff we sometimes buy.
A spending plan is a flexible experiment that accommodates your occasional sample-sale bender, night out, or any buying spree (Retail Therapy).
1. What are the main things you like to spend on?
What do you like to buy? Some clothes? There is a sale? Research shows that spending on experiences such as trips, activities, great food — makes people happier than acquiring things.
Examine your spending patterns and try to be as objective as possible.
Some people, specially women say they will stop buying clothes that they don’t need, but still keep on buying, then they finally realize that they just really like new clothes.
It’s better to accept it and plan for it rather than judge yourself for being superficial and materialistic.
There maybe several expenses that you aspire to care about but actually don’t like watching netflix movies or going to the saloon or the gym membership you never use, this can be kept in mind while planning and hundreds of dollars saved can put toward something more rewarding.
2. List your Goals and keep them in mind
Let’s consider our goals.. Some goals are long term as they are expensive items and experiences some are short term and not so expensive,
like If I want to buy something small, I’ll put it on my short-term goal list, and reward myself with it once I’ve saved up.
It’s better than saying things like “I’ll never have a latte again” if lattes are your thing.
You have to let yourself off the hook every once in a while, but make it part of your plan.
”Same for long Term goals”, it takes longer to achieve but they can be achieved too!
Hope this article helps people who are just starting with Budgeting 🙂