Many people discard the idea of budgeting as they perceive that it involves complex calculations. However, the reality is that creating a budget is a simple process, and you can easily create one by following some straightforward steps. In this article, we will show you how you can create a budget in five steps.
1- Calculate your income
The first step to create a budget is calculating your income. For the purpose of budgeting, you should consider your after-tax income as your income because this is the amount that is available to you for spending. If you have other sources of income as well, you should include them in calculating your total income.
2- Calculate your expenses
To calculate your expenses, you need to first identify your fixed and recurring monthly expenses. While fixed and recurring expenses can be calculated easily, you’ll have to estimate your variable expenses. To estimate variable expenses, you will have to analyze your bank statements and credit card statements. Alternatively, you can record your expenses for the first month to have a reasonably accurate idea of your total monthly expenses.
3- Select a budgeting approach
After calculating your income and expenses, you should select a budgeting approach for creating a budget. There are several approaches you can consider for budgeting: zero-based budgeting, 50/30/20 budgeting, and envelope system.
Zero-based budgeting involves allocating your income to expenses and savings until the income reduces to zero. The aim of zero-based budgeting is to use each penny of your income in a productive way.
The 50/30/20 budgeting approach involves spending 50% of your income on needs, 30% on wants, and saving the remaining 20%. The aim of this budgeting approach is to allow you to spend on different categories of expenses while saving you some money each month.
The envelope budgeting system allocates specific amounts to each category of expenses. After the money in envelopes reaches the allocated level, you cannot spend any more money on it.
4- Change your spending habits
To successfully implement your budget, you need to change your spending habits as you cannot afford to breach the limits you set in the budget. You might struggle to control your expenses initially, but you will get better at it over time. You should not lose hope and continue with your budget to improve your financial condition over the long term.
5- Stick to your budget
After creating your budget, the challenging part is to stick to it. If you continuously breach your budget, you might review it and include some changes. But it should enable you to achieve your savings target at the end of the month. If your budget saves you from funding your purchases through loans and also helps you save some money every month, it means that your budget is serving its purpose. As your income increases, you can then revisit your budget to achieve the goals you want to achieve with your budget.
Final Thoughts
Budgeting is the most important activity that will help you streamline your finances. Creating a budget is not difficult, and you can easily create a budget by following the easy steps we mentioned in the article. If you want to achieve your monetary goals, a budget will help you achieve them easily and quick
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