Why Having A Budget Plan Is Important
I already tackled the importance of a budget plan before. If you haven’t read my previous post about it, then you better read it here. If you don’t want to, then here’s a little summary.
A budget is a plan that helps you keep track of your expenses, it’s something that a person having limited money can really use. A person wanting to pay his or her debt could help him/herself too by creating his/her own budget plan. Even children or students need to know how to budget their allowances.
Having a budget gives you control to your money and let you make the most out of it. It can help you achieve your money goals and it can even assure you that you’ll be sleeping without worries at the end of every day. A budget is really essential in having a better financial life, so why not make your own budget plan today?
Things To Do Before Making Your Budget Plan
- Assess your income
The first thing you should know before making a budget plan is how much money you can spend or save. Your income can come from your job’s salary, your investments or even through donations. Unfortunately for you, your credit card‘s credit limit couldn’t be listed as one of your income sources. Even though you can use it on spending, you cannot save it because it’s not really your money. It belongs to your credit card provider and not to you.
- Keep track of your expenses
You do this before you make your budget plan, so that you could have an idea on where your money is going to. It is advisable to keep track of your expenses for about a month or two, not for a week. List them on a small notebook, so that you can’t forget them because you’ll be using them when you start making your budget plan.
- Set a goal
Last but certainly not the least, is to set a goal. It doesn’t matter if it’s long-term or short-term, any goals are good. This is just for motivation purposes but if you really have a goal in mind, which is the reason why you decided to make your budget plan, then that would be great. Some examples of goals are “to save up for a new *insert item here*“, “to increase savings“, or “to pay off debt“. Just make sure that it’s realistic and you can achieve it with what you have today.
The Right Formula To Use In Making A Budget
After tracking your expenses for the past month or two, the next thing that you should know is the 50-30-20 formula. Have you ever heard of the 50-30-20 formula that most wealthy and/or successful people use on making their budget plan? If you haven’t, then don’t worry because I’ll explain it to you one by one.
The 50-30-20 formula is all about where you’ll be putting your income, the numbers represents the percent of your money that will go to certain categories, such as the following:
- 50% goes to your NEEDS
Needs are things you need or can’t live without, common examples of needs are food and water. These are the thing that you should prioritized and they should already have a fixed amount of money on your budget plan.
- 30% goes to your WANTS
Wants are simply things you can live without. These are the things that you don’t really need but you can’t stop using your money on them. Some examples of these are when you buy expensive things like branded clothes or medicine, watch cinema, dine out often and other money-wasting habits of yours.
- 20% goes to your SAVINGS
Yes, you read that right, “S-A-V-I-N-G-S“. I don’t think that I have to explain this further, everybody needs to save. Remember to deduct 20% off your monthly income, then put it straight to your savings account or to make things more interesting, invest it. There are a lot of “low-risk” investments out there that can help you grow your savings better than your bank can.
You don’t really need to follow this formula exactly. If I were you, I would adjust my budget and just get some ideas from this 50-30-20 formula.
You have the option to increase your saving by 5% or 10% and just decrease the percentage that your wants have. Or you could still do some of your wants but you must decrease the amount of money you put on your needs or savings. It all depends on you, someone told me before that budgeting and adjusting are related to each other in some ways, so learn to adjust your budget and maybe there would be a day that you could make a budget plan that is perfect for you.
How To Make A Budget Plan In 10 Easy Steps
- Get a notebook or any piece of paper and a pen
- Write your goal at the top
You already have a goal in mind, right? If not, then start thinking of one now. To make things more exciting, you should also set a deadline. This can help you determine if you’re making any progress or not.
- Make two columns and write the words, “INCOME” on the 1st column and “EXPENSES” on the other.
- Fill out the 1st column (INCOME).
List all your income sources there and how much money they are contributing to your monthly income.
- Save 20% of your income and don’t forget to deposit it to your account immediately.
- Categorize your expenses.
What I mean is for you to differentiate your expenses between wants and needs, and list them down separately in the expenses’ column.
- Eliminate as many “WANTS” as possible
You don’t need to dine out thrice a week but you do need to eat, so just eat at home instead. You also don’t need to buy new clothes every week or month, that’s another one that you could eliminate.
- Determine how much you’ll be spending on each item
Put the amount of money your willing to allocate to each expenses you have. I advice that you put more money on your needs and make sure that the number of items on your wants are not more than to those on your needs. (NEEDS > WANTS)
- Do the Math!
Add everything in each column up, then subtract the sum of your expenses (Needs + Wants) to your income. If the answer is in positive value, then you’re doing great and you’re ready to take your plan into reality. If not, then proceed to the next step below.
- Review everything out
If you have a negative value as an answer, then you should take a look at your budget plan and eliminate those unnecessary expenses that you still have. I hope you could have a positive result by doing this. If you still don’t get one, then it’s time for you to go to a professional financial planner and see a psychiatrist as well, just kidding. Just learn to adjust things up and you’ll be good in the end.
I hope by following those steps you were able to make the perfect budget plan for you. Always make sure that you follow and do your budget plan. All the work that you put up in making the plan will all go to waste, if you don’t incorporate them in real life. I recommend that you always bring your budget plan with you to remind you of things that you should and should not do.