Budgeting is a funny subject to approach and as necessary as it is, we never get taught this. For some people, it’s a negative concept with negative connotations. For others, it’s a powerful financial tool. So in this article, I am going to share how to create the perfect budget in 4 steps.
Budgets are used in all walks of life. Countries use them, religious organisations use them and businesses use them. So why don’t we use them? The truth is, I don’t recall ever being taught how to budget. Not at home and not in school.
In fact, the first time I remember realising I had to figure it out was in my teens just after I got my first paycheck. Back then I was stacking shelves and got paid weekly. I remember spending the entire paycheck and suddenly coming to the realisation that I had rent and other bills to pay. In the ensuing panic, I quickly figured out that I had to plan what I spent money on and in what priority.
Money is a tool to enhance our day-to-day life. It’s there to help us do the things you enjoy like going out or taking a big holiday every year. Knowing how to create the perfect budget not helps our money go further but it helps us develop financial discipline. A budget will also relieve the stress of living paycheck to paycheck.
So how do you create the perfect budget in 4 steps?
First, know your numbers.
You need to know what you’re working with. How much do you have coming in each month?
This will give you a clear picture of your monthly earnings and a good base to start from. If you have an irregular income, take a look at your earnings over the last three months and take an average.
Second, know your expenses (what money is going out).
How much of your expenses are essential and how much could be classed as non-essential or discretionary? In an ideal world, once you’ve worked this out, you should have an amount of money left over. This is disposable income that you can allocate toward the things you enjoy or building for the future.
If you don’t have any money left over after, then you need to consider a number of options.
First, reducing your expenses. This may entail taking a good look at what you’re paying for and make some sacrifices. It might mean cancelling your Netflix or Spotify subscription or something more substantial. Second, earning more money. If you have more going out than you have coming in and options one isn’t possible, then you need to earn more money. Consider getting a better paying job or developing a side hustles or alternative streams of income.
Creating the perfect budget is all about knowing your buckets. They say it’s good practice to save 20% of what you earn. It’s only possible to do this if you have disposable income. In the real world, 20% may not be realistic for everyone, so it’s important to know what works for you. What percentage of your income is allocated to essential expenses? What percentage goes toward non-essential and what percentage is left over?
Fourth, allocate your disposable income.
Define a purpose for it and put it to good use. Be intentional.
This is where you have a choice to make. Do you allocate these fund entirely to life pursuits like holidays, hobbies, luxuries? Do you point them towards something that helps you build for the future? Or do you do both?
There is no right or wrong answer here, and you shouldn’t feel guilty about the choice you make. Each of us has different priorities, what’s important is that you feel 100% happy with your decision, knowing that you’ve achieved a sense of balance in your finances as they are today.
What do I have to help?
To set you on the right path download my free Spending Planner here
The spending planner consist of 2 documents. A range and estimates worksheet and spending plan. Use the Range and Estimate document to find out where you are on the earnings table. It automatically works out your take-home pay and provides three expenditure plans for guidance. Try to ascertain where you are currently and what scope you have, if any, to move between plans. Refer back to this when completing the budget planner.
That is my guide on how to create a perfect budget in 4 steps. To watch a video on this topic click here
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