Overview
"Budgeting" is the process of creating a plan for how much money you'll spend. This spending plan, called a "budget", allocates a certain amount of your money for personal use. When budgeting, you should consider both your revenue and expenses to create a budget that doesn't bring you into debt.
Importance
Why should you have a budget?
For starters, a budget can help you spend within your limit. If you know how much money you make and spend in any given time period, you can use that knowledge to help you spend within your limits. Overspending is a dangerous habit as it can drive you into a sea of debt; budgets can help you avoid that.
In addition, making a budget can reveal your spending habits. As you create your budget, you'll come face to face with how you spend your money, and if you're spending it on what truly matters (or not.) For example, you may find that you always pay your credit card bills in time and don't owe any late fees. Or you might find that your subscriptions are costing you more than you thought they did. In any case, budgeting allows you to see how healthy your spending habits are, and may be the first step in changing any habits that are obstructing your long-term financial goals.
On that note, a budget is essential in maintaining your financial wellness in the long run. The process of budgeting itself forces you to think about both the money you make and how you spend that money, allowing you to determine what changes you'll need to make to improve your financial situation. When you finish, you can look over your budget and figure out how long it'll take you to achieve your financial goals - to get that car you really want, buy your first home, or maybe go on that vacation you thought you'd never be able to afford. Your budget can cast light on what you truly want from life and how much money you'll need to get to the places you want to go.
How To Budget Effectively
Want to create a realistic spending plan, but aren't sure where to start? Here are some pointers that will help you budget effectively and painlessly.
Step #1: Identify your revenues and expenses
This is how you begin creating your budget. First, decide on a time period for your budget. This could be anywhere from a month to a year, though we recommend 2-3 months, especially for beginners. Next, identify all sources of revenue - that is, the money you make. This includes your salary and any interest you earn. Add these accounts together to figure out how much money you put on the table in the time period you chose. Now you can move on to your expenses. This means any money you spend in your chosen time period, not including any one-time emergencies (such as car repairs.) Add these accounts together as well. Look over your revenue and expense totals and ask yourself: Am I spending more money than I'm making? How can I increase my revenue, or lower my expenses? Do I have enough money for emergencies? Keep these questions in mind as you continue with your budgeting process.
Step #2: Separate your needs and wants
Your expense accounts can be further divided into two main categories - your needs and your wants. Your needs include things like rent, groceries, transportation, and medicine - anything you can't live without. Your wants, on the other hand, are things you'd like to have but don't need to survive, such as eating out, streaming services, or the latest tech. Separating your expenses into your needs and wants can help you figure out if you're wasting, rather than spending, your money on luxuries you don't need. Ask yourself: could you go without a music subscription or expensive new clothing for a while? Spending money on your wants is important, of course - it can relieve stress, boost creativity, and is a form of self-care - but overspending on these luxuries is dangerous, and you may find it in your best interest to save or invest that money instead. Try finding ways to have fun without spending as much money - for example, a movie night at your friend's house instead of going to the theatres.
Step #3: Set financial goals for yourself.
Now that you know how much money you make, how much money you spend, and what you spend your money on, you can start creating financial goals for your future self. Financial goals can be as simple as saving for retirement or as ambitious as starting a new business. If you love travelling, maybe you'll want to save enough money to fly overseas; if you have a family, then you'll need to start funding for your child's education. No matter what financial goals you have in mind, you must ensure that your goals are realistic. Unrealistic goals only set you up for disappointment, and can cause you to feel financially demotivated. Make sure the goals you set are something you can actually achieve by planning every step along the way.