Creating a budget can seem daunting, but it’s a crucial step in taking control of your finances. A budget is like a roadmap for your money, helping you make the most of your hard-earned cash. In this post, we’ll break down the budgeting process into five simple steps.
What is a budget?
A budget is like a plan for your money. Imagine you have a piggy bank, and each month you get a certain amount of money to put in it. A budget helps you decide how to use that money in the best way possible.
5 steps to make a budget.
- List your income.
- List your expenses.
- Create a budget.
- Adjust and review your budget.
- Stick to your plan.
Step 1 : List your income.
The first step in creating a budget is knowing how much money you have coming in. This includes:
- Salary (which is your net income after taxes)
- Side Hustles (any additional income from part-time jobs or gigs)
- Dividends, interest, or rental income
- Alimony, child support, or any other regular income.
For example,
Salary = $2500
Babysitting = $600
Total = $2500 + $600 = $3100
Step 2 : List your expenses.
Next, you need to understand where your money is going. Track your spending for at least one month.
When you buy groceries or skincare products, jot down the amounts in your notebook. Once you have a rough total, you can set a budget for each category. This will help you identify areas where you can cut back and maximize your savings.
Step 3 : Start Budgeting.
There are many budgeting methods out there, but don’t waste time deciding which one to follow. I recommend starting with the 50/30/20 method. It’s straightforward and easy to follow. Allocate 50% of your income to needs, 30% to wants, and 20% to savings. Some people prefer writing things down with a budget planner printout, while others are more comfortable budgeting digitally with a spreadsheet or apps. It all comes down to personal preference.
50/30/20 Budgeting Method
50% – Needs (housing, food, utilities, etc.)
$3100 x 50% = $1550
30% – Wants (entertainment, hobbies, etc.)
$3100 x 30% = $930
20% – Savings (savings and debt repayment)
$3100 x 20% = $620
Step 4 : Start saving $1000.
This $1,000 will be your starting emergency fund. As a beginner, this is your main goal. As you progress, aim to save 3-6 months’ worth of living expenses. This fund will be your backup for urgent matters, like car breakdowns or house repairs. Having this money saved will keep you calm when unexpected things happen. If you’re just starting out, single, and don’t have kids, 3-6 months’ worth of living expenses is recommended. If you have a family, aim for 6-12 months’ worth.
Step 5 : Pay Off All Your Debt.
Debt is a major obstacle to building wealth. Imagine if you could invest the $500 you currently spend on debt payments each month into an investment with a 10% annual return. Over time, this could add up to around $100,000 in 10 years! Paying $200 towards debt might not seem significant, but imagine waking up one morning with no debt and no loans. Even if we don’t live a super luxurious life, isn’t being debt-free the best feeling ever? It brings confidence and security, knowing you’re no longer tied down by financial liabilities. PEACE OF MIND.
Reminder : Know your why.
It’s easy to get distracted and lose focus on your financial goals. Knowing your why – the reason you want to budget and save – will help you stay motivated and committed to your goals.
Conclusion
By following these five simple steps, you’ll be well on your way to creating a budget that works for you. Budgeting is not about depriving yourself of things you enjoy, but about making conscious decisions about how you spend your money. It’s about prioritizing your goals, saving for the future, and breaking free from the cycle of debt. Remember to stay consistent, review your budget regularly, and make adjustments as needed. Happy budgeting!
