Creating a budget that you will be able to maintain over the long term is a simple way to cut expenses and pay off debt, as well as increase your wealth. While devising a budget can be a big task, it’s definitely worth the effort.
Calculate what you’ll need
To create your budget, you’ll first need to know how much you’re currently spending. So consult your bank statements, receipts and financial files. Since some of your expenses will be sporadic, such as vehicle registration or health insurance, the best way to get an accurate financial picture is to calculate an average spend over at least six months. Do this by adding all your payments for the last six or 12 months, then divide by the number of months. This will give you your average monthly expenses. Before figuring out your monthly expenses, make sure you double check your sums – forgetting to add a bill can make a big difference to your overall spending plan. Also, try your best to factor in unexpected bills, such as dentist bills or car repairs, by adding an extra 10–15 per cent to your total expenses.
Work out your income
Now that you have an idea about your monthly expenses, you can work out your actual income. In addition to your regular salary or support pension, factor in any additional funds that you receive throughout the year. Include any rental income, cash gifts received and sales of your belongings, whether online or at markets.
Determine where you stand
To give yourself the best chance of creating a realistic budget, you need to determine whether you have a budget shortfall or coverage. To do this, simply subtract your monthly expenses from your income to find any remaining amount. If you discover that your ingoings are higher than your outgoings, you’re off to a great start. This amount can be used for pay off any debt or be absorbed into your savings. If you find that you’re spending more than you’re making, you’ll need to take some time to determine how you can reduce your spending (or increasing your income).
Cutting back on extra expenditures means looking at your monthly expenses and deciding which luxuries you can live without. When small payments are cut back, you can make significant savings. For example, one cup of coffee per day, five days a week, at around $3.50 adds to $70 per month. The tougher you are when cutting back, the more money you’ll be able to set aside for other important things. Try to find 10–20 per cent of your income each month to add to your savings account. If your extra expenditures are already low and you can’t find much to cut back, you might need to think about how to increase your income.
Keep a record of your expenses
Now that you have a budget, the next challenge is to stay on top of it. Keep a record of all of your expenses and income by writing everything down in a book or using one of these handy budgeting apps. Taking note of all your money will make you more mindful of saving it and not splurging unnecessarily.
Go easy on yourself
If you manage to stick to your budget most of the time, you’ll come out on top and reach your financial goal eventually. It’s okay to break your budget sometimes, as long as you get back to it as soon as you can. Remember not to be too strict– it can be a good idea to set savings goals and then reward yourself when you reach them.