Tips and Steps to Follow When Making a Budget
It is important for any person who wants to keep his or her spending under control to come up with a budget. With the hard economic times being experienced worldwide; any person would have the interest in knowing where to spend or where not to spend, where to under-spend and where to overspend. The total amount you can make and the total amount you can spend. Having such information at hand, you will be able to comfortably come up with an effective budget on where and when to spend your hard earned cash.
People do come up with budgets in their day-to-day operations. However, it is necessary to know the guidelines and factors to consider whenever you are coming up with a budget. The following steps will help you in coming up with a suitable budget.
Come Up With a List of Expenses
Coming up with a list of your expenses is the first step you should always consider in order to come up with a realistic budget. You need to keep track of your expense record. Most people are too dependent on computers when making an expense list. However, most of the computers that can track expenses are only able to analyze your credit and check payments. Computers never record the cash outlays. It is important you come up with your own expense record rather than relying on a computer program. You need to keep track of your expense in a comprehensive way. This is how you will have this done:
Using one sheet of paper per week, ensure you note down all your expenses for a period of two months. This will enable you not to come up with a weekly or monthly budget of high or low expenses.
Start by listing down all you expenses by starting with the first day of the month.
- Create up to seven columns on the sheet of paper. One column represents each day of the week. Remember to record the date at the top of each column.
- Always carry that sheet with you all the times.
- Remember to record any expense you pay for by cash or its equivalent. In case you make payment using either a credit card bill always remember to list down all the expenses you have paid for.
- At the end of every week, put away that sheet of paper and take a new one for the week ahead.
- At the end of the two months, ensure you list annual, seasonal or quarterly expenses you incur but failed to settle during the two-month period. The most common are magazine subscription, property taxes, car registration, insurance payments and tax preparation fees.
Total Your Income
Your expenditures only account for half of the picture. You will need to add up your monthly income too. Take a blank sheet of paper and list all the jobs for which you receive wages and salary. Note down all the self-employment from which you always receive your income include sales commissions and farm income. Also, list other sources of income such as:
- Public assistance
- Bonus Pay
- Alimony and child support
- Dividends and interest
- Pension and retirement income
Record the Net Income
- Below each source of income, indicate the net amount after all the deductions you receive after each payment period. In case you don’t receive the same amount each period, just indicate the average of the last 12.
- Indicate the period covered by the payment next to each net amount.
Determine Monthly Income
Lastly, multiply the number of pay period by the net amount to determine the monthly amount. For example, If you are paid thrice a month, multiply the net amount by three. When you are through, total all the amounts. This will be your average monthly income.
Make Your Budget
After keeping track of all your expenses and income for some few months, you are now ready to come up with your budget. Your main goals in creating a budget should be:
- Start saving money
- Control your impulses to overspend
Follow the steps below to create your budget:
- Figure out the categories in which each of your expense fall. On the left side of the paper, note all the categories. Feel free to use as many sheets as you need to list down all the categories. These will be your budget sheets.
- Make 13 columns on the sheets containing your lists of categories. Name the first column ‘projected’ and the remaining ones to represent the months of a year. If today is not the first day of the month, start with the next month.
- Project your monthly expenses for the categories you listed by using your total actual expenses for the two months you have been tracking them.
- On the ‘projected’ column, enter your projected monthly expenses.
- Add all the projected monthly expenses and the ‘total expenses’.
- Enter the projected monthly income below the total projected expenses.
- Get the difference.
Reducing Your Expenses to Meet a Budget
There are times when your expenses might exceed your income. It will force you to cut expenses or increase your income. In case increasing your income is not possible, try focus on reducing your expenses. Ensure you do this by not depriving yourself from the services or items you cannot do without.
Try Reducing the Amount You Spend in Each Category
Take time and review all your expenses and look for the categories you can easily reduce. For example, if you need to reduce your $175 from you budget. You might have planned to spend a total of $100 a month on meals but you are ready and willing to cut the amount to $50 thereby saving $50.
Try Preserving the Items You Cannot Live Without
Come up with a list of things you feel are a must have and without them, you cannot survive. Try whittling down all your other expenses in order to accommodate them. For example, you can easily do away with the newspaper and magazine subscriptions.
Staying on Track
Never ignore your budget. In case you do not adhere to what you have in your budget, there are chances you will spend more on an item than you had budgeted for it. This will in turn, frustrate you and most likely you will scrap off the budget altogether. There are people who will always come up with a really nice budget though they will follow it for a very short period of time and resort back to their usual ways of doing things. They never know how much they spend. Such people are known to at times have a high value of income and still fail to pay their debts and expenses in time. Preparing a budget is not just enough; in fact, the most critical or important part is ensuring you stay on track.
Review the Budget and Make Necessary Adjustments
Always check your figures after some time. In case you do not have enough money to meet all that you noted in the budget, then you can make some few adjustments. In case you keep on overspending in one category or area; you can try increasing the money in that category and trimming the money from the other categories.
Consider the Larger Financial Changes
In case you keep on coming short, you may consider making some larger changes to your budget. For example, you might consider selling your new car for an older one in order to reduce some payments. However, you need to consider your priorities when making the changes in your budget. Always be honest about yourself.
Be Ready to Sacrifice
There are times when you will have to sacrifice some of the things you feel are important to you. You need to be realistic, though! It is also worth noting that within the first few months, you’ll find it hard to follow the budget. The old spending habits will still be haunting. But after some few weeks or months, you well get used. Despite the challenges within the first few months, it will be a big win for you as you will save more and learn to prioritize the different budget items. Sacrificing will also teach and help you stop bad habits like excessive drinking and partying.
Benefits of Having a Well Planned Budget
Most of the top and well-performing organizations always have a budget in place. Listed below are some of the top benefits that come with having a well-prepared budget.
Budgets Provide a Financial Road Map
A well-prepared budget will help you know how you can successfully get from here to there while listing all the necessary resources you will require accomplishing the task. The process of budgeting is always a powerful tool for any organized family or top management. Baseline Budget refers to a type of budget, which uses the current spending to come up with future funding requirements. After the budget has been established, an organization should always consider the chances of funds, which have been noted for each line item. Organizations should also consider preparing a pessimistic budget, which is based on the reduced revenue projections, and help determine the most likely cuts in case it is made effective.
The nonprofits should never shy away from preparing a balanced budget. In fact, there are lots of positive reasons why a budget will have a surplus at times.
Budgets are Essential Management Tools
Management can always determine if they are indeed meeting their goals by comparing the performance of an organization through its budget they can know the exact areas where they need to make corrections. Without having a well-prepared budget, it is impossible to determine the type and where changes should be done.
Well Prepared Budgets Help in Bolstering Revenues
Getting concrete figures s important in helping you secure more revenue through grants or other funding sources.
Well Prepared Budgets Provide an Internal Control
This is the most obvious benefit that comes with a well-prepared budget. It will allow you to effectively monitor finances. This will ensure organizations are well guarded from fraud and other possible financial risks. Organizations should always come up with a budget after every two months to ensure the tracking to budget is relevant and accurate all year round.
For most people, the word ‘budget’ will mean management and allocation of money. For organization especially the non-profits, budgets can really mean more. The process of coming up with your budget can be overwhelming at times. However, it is worth having. In fact, recent estimated reveal that only 40% of the American has a working budget. Creating a budget that you can easily adhere to can equally mean creating wealth while helping you to figure out the how to cut expenses and get out of debts. For example, I knew the approximate amount of money I was making on a yearly basis when I first came up with my budget some few years back. However, I have never broken down on the expenses category to figure out what I could easily afford on a frequent basis or the total amount of money I could invest on a regular basis.