Budgeting is not something that a company or business alone does. Creating your own budget is the key to managing your money.
When you start budgeting, you became aware of how much money you actually have and how much you spent and that helps you manage your finances wisely.
Once you create your budget, try to follow it. This will make you intentionally spend your money and plan ahead for the future.
Here are the 5 ways to create a realistic budget.
1. Find Your Reason Why
Knowing the reason why you want to create a budget plan is the first key to creating a realistic budget. Your ‘why’ will become your driving force to help you focus and stay on track.
Your reasons can be:
- To make more money online or offline.
- To be able to save for your future retirement.
- To pay off your loans.
- To start investing.
- To start a business.
Once you decide on your whys or reasons, set yourself a goal time stamp on when you want to achieve it.
For example, you want to buy a house after 2 years from now. And so, you want to start saving up for that so that you do not need to take a huge loan for the same.
And being aware of what you want to achieve, you will begin to acknowledge every single cent you make or spend!
You can use a budget planner or just use an excel sheet to achieve your budget goal.
2. Know exactly how much money you have
After you know your reason for starting a budget plan, the next step is to know how much money you have. Find the total amount of money you get from your salary each month after deducting your tax.
For example, if you receive 2 paychecks at $1200 each month after tax, your take-home salary is $2400. So, knowing how much money comes in month after month will help you plan and know how much you can spend each month.
3. Track all your spending
One of the main things that leave many of us broke and falling into debt is the absence of tracking our spending.
Knowing where your money goes is the factor that will decide your financial well-being. It is important to note down every penny spent.
Here are example percentages of spending you can follow:
- Housing: Under 25%
- Utilities: 5-10%
- Groceries: 5-10%
- Transportation: 5% – 10%
- Insurance: Under 20%
- Fun & Charity: 5% -10%
Once you track all your spending, and lower your expenses and spending, you will be able to see where you need to cut your spending.
For example: Netflix subscription which you do not use often and very well can live without it, those apparels you bought which you hardly wear – the ones you bought on impulse!
Always look for ways where you can save a dollar here and there from your spending and put that amount in a piggy bank.
For example: You want to indulge in dining out when you have already had a party yesterday. Let’s say, if you did go for a eat away, your spending would be $50. Resist that urge to dine away, instead put the $50 dollar bill in your piggy bank. Do this every time you want to waste money buying something that you actually do not need.
I can tell you that at the end of the month you will be surprised to see you have saved more than $150! You can use the money for something like paying your gas or electricity bill or credit card bill!
Now that you know how much you make and how much your spend in a month, start your budget by using either one of the following:
- Budgeting Apps like Intuit Mint, EveryDollar, Walnut, and Goodbudget.
- Budget Planner
- Ledger Book
- Cash Envelops
Note: Using a physical notepad to track or plan your budget might give you more consciousness as you are giving an effort to write them down. It might not be the case with everyone, but that is what I feel because it makes me more aware of my financial status.
4. Increase your income
The hard truth is, you are not likely to get financial stability from just one job and so you need to look for ways to increase your income.
Now that you lower your expenses and cut out those unnecessary spending, look out for more ways to make money. It can be done online or offline according to your convenience.
There’s only so much money you can save. This is why this step is especially important. Once you’ve done what you can to lower your expenses and cut out unnecessary spending, it’s time to find ways to earn more money.
Some of the ways to make money online side hustles you can do are:
- Becoming a freelancer
- Start a blog
- Start a YouTube channel
- Sell digital products
- Create a course
You can find out more ways to make extra income with these 16 Ways To Make $1,000 a month from home.
5. Start saving
Regardless of what your financial goals are, you must have an emergency fund. Accordingly, your emergency fund must be at least 3 month worth of your salary. Some financial gurus advise for a 6-month salary so that you can face unexpected rainy days.
Make it a point to save at least 10-20% of your monthly salary and do not touch that money unless there is a dire situation like health issues or something that is a matter of life or death. Focus on fulfilling your emergency fund goal first even if you have debts to pay by using a Saving Book and putting your money in high yield savings account.
Once your emergency fund goal is achieved, move on to use the extra surplus of money to start your business or do something that can generate passive income streams that will continue to bring you money month after month.
Note: Plan your budget ahead for the coming month. For example: Start planning for February in January so that you become well aware of how to diversify your income on payday.
To sum up, the 5 steps to creating a realistic budget are:
- Know your reason why.
- Know exactly how much money you have.
- Track all your spending.
- Increase your income.
- Start saving.
Budgeting might be hard since you are starting something new. You will face difficulties at first but do not be discouraged.
Try to stick to the plan and make it a habit. You might need a few adjustments here and there in the beginning too and that is fine. Do not be too hard on yourself but be very reasonable.
When it comes to budgeting, it’s always better to follow the head instead of the heart.
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