Updated: Jun 27, 2021
Going through your personal finance life journey without a budget is like taking a fish out of water and expecting it to live. A good budget plays a vital role in ensuring that you meet your financial goals and targets. However, it’s all very well knowing why you need a budget, but a budget won’t do you much good if you don’t know how to stick to it.
According to a recent financial survey, only 35% of Americans can predict how much they spend in a month. This figure shows that a large number of Americans do not have an operational budget and those that have don’t stick to it. Planning and progress study research has also shown that the major cause of stress for an average American adult is money issues.
It’s clear that many US residents do not yet have a good handle on their money and budget. So, what are the best practices for creating a personal budget?
1. Develop a plan
Approaching budgeting without a clear destination in mind is like going on a journey without knowing the address of the place you want to reach. In both instances, you will end up in the wrong place. Write down the long, medium, and short-term financial goals that you want to achieve. This will help you to make provisions for them in your budget. Know what you want to achieve through budgeting. If you know your destination, you’ll be able to tell when you have arrived.
2. Come up with a budget
Ensure you have all the necessary documents so that you can extract the data you need. These might include payslips, bank statements, and receipts for expenses. Start by calculating your total monthly income from all sources. Then, calculate your total expenditure.
Your total expenditure should include both variable and fixed expenditure. Fixed expenditure can be easily estimated and includes items such as rent, car loan repayment, and others. Variable expenses on the other hand change with time. Separate your income and expenditure into different categories. You are off to a good start if your income is comfortably higher than your expenditure.
3. Track your progress
Preparing a budget is the easy part. Sticking to the budget you have prepared is where the hard work lies. Review your budget periodically to ensure that you are on the right track. If possible, and especially in the early days, run a daily check to determine the progress that has been made so far.
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4. Do a monthly budget evaluation
To make consistent progress in your budget, it’s a good idea to run a monthly budget evaluation until you get a hang of the whole budget thing. Running an evaluation on your budget will help you identify possible areas of weakness, as well as the things you’re doing well. This will help you to make adjustments where necessary.
5. Keep setting new goals
Setting a financial goal is a continuous process. The last goal that you achieved lays a foundation for the next one and ensures your progress. One of the ways to encourage yourself to meet the goals outlined in your budget is to reward yourself each time you meet one.
Getting the best out of your budget can take a lot of discipline and practice. However, it is a journey that is worth embarking on as it will pay off in the end.