BASICS OF BUDGETING - 3

How To Set up Your Budget

Setting up your budget does not have to be tedious or time consuming, all you need is a good understanding of the basics which we have discussed in our last two posts in the budgeting series so if you are yet to read it, I advice you go ahead to read them before you continue reading this post.

Below is how you can create a simple and  straightforward budget that works for you;

1. Have a New Mindset

I know you might think it does not really matter, but for you to actually make a budget that works you need to have a renewed mindset about budgeting. You need to understand that budgeting is not a one-off task and acknowledge  that you are committing to a regular and ongoing process, this will help you maintain your budget, which is far more important than just creating one.

2. Set Realistic Goals

Setting goals gives you focus on where you want to improve in your finances and to do this you need to evaluate your financial performance, know how you are spending your money, what you would like to buy and when you want them.

After doing this, then you can set goals like - create an emergency fund, buy a car, buy a new phone etc. 

3. Identify Your Income and Expenses

If you are a 9-5 worker identifying your net income should be easy for you, but if you are a freelancer or contractor, you need to gather your income statements from the past 6 months to be able to determine your average income.

Then make a list of all your expenses even to the smallest one. After making the list, put in an estimate of what you think you spend on each item. To have a more accurate estimate, you may need to gather all previous financial statements like your bank statements, bills, purchases notifications, etc. Tracking your expenses also helps you determine whether you are spending more than your income or not.

If you need more clarity on how to track your expenses, our post on how to track your expenses would be helpful. 

4. Identify and Separate Your Needs From Your Wants

After calculating your expenses, categorise them into needs and wants. Needs are mostly necessary items while wants are items that can you live without. 

So while separating your needs and wants, you should ask yourself this questions: Do I want this or do I need it? Will spending this money get me closer to my financial goals or further away? Can I live without it? So set clear priorities for yourself and the decisions become easier for you to make.

5. Create Your Budget

Having done all the above, you should go ahead and create your budget. When creating your budget, think of it as a “spending plan,” a template to be aware of how much money you have, where it needs to go, and how much, if any, is left over. 

There are different budget models you can follow when creating your budget, but most importantly your budget should meet your needs first, then the wants that you can afford and your expenses should also be less than or equal to your total income.

Note: If your income is not enough to cover your expenses, adjust your budget (and your spending) by deciding which expenses can be reduced.

6. Pay Yourself First

When creating a budget, most times we are always focused on having enough money in our budget to cover our most important expenses (like rent, food etc.), that we forget about saving or investing (if you are debt free). If you are very serious about gaining full control of your finances you should consider building a habit of putting some percentage of your earnings into your savings, the 50/30/20 budget model makes provision for your savings but you can always tweak it to your taste. Practising this will help you prepare for emergencies.

Bonus Tip:

Make it a habit to pay attention to getting better in budgeting every day. Budgeting won't always be easy and you might not get the hang of it at your first try but keep in mind that you will get better as time goes on.

 

So make sure you do everything in your power not to trail off. It’s so easy to skip one month of your budget due to being especially busy or simply just life happening in general. Skipping one month can lead to skipping a number of months, and then your better budgeting can become just a hazy memory in your rear-view mirror.

I hope this post has increased your desire to take control of your finances and work towards getting financially free. You can always let me know in the comments section. Also, remember to follow us here and on our social media platforms, it takes less than five minutes, and the benefits are enormous.

Bye, see you soon!