Budgeting is an essential skill for managing personal finances and achieving financial goals. However, it is often seen as restrictive and tedious. With some planning and discipline, budgeting can actually liberate you and provide a sense of control over your money. Here is a blueprint for budgeting to help you master the art of managing your money.
Table of Contents
Know Your Income
The first step is to know exactly how much money is coming in each month. List all sources of income, including your salary, spouse’s earnings, rental income, government benefits, interest income, etc. Be sure to account for income that may fluctuate seasonally or change at different times of the year. Understanding your total monthly income is crucial for figuring out how much you can realistically allocate to different expenses.
Know Your Expenses
Next, record all of your fixed and variable monthly expenses. Fixed expenses are the same amount every month, like rent, car payments, insurance premiums, etc. Variable expenses are ones that change each month, like groceries, dining out, entertainment, etc. Track your variable expenses closely for a few months to determine an average amount spent. Don’t forget to include annual or periodic expenses too, like property insurance or car tax. Knowing where your money is going is key to creating a balanced, realistic budget.
Use Budgeting Tools
Technology makes budgeting easier than ever. Download budgeting apps and use spreadsheet templates to organise your finances. Mint, You Need a Budget, and Personal Capital are popular budgeting tools. Their digital platforms integrate with financial accounts to automatically track income and spending. They also provide nice budget reporting features to keep you informed. Use the app that fits your budgeting style and needs, such as MT4 if you decide to devote some of your discretionary spending on investments.
Set Budget Priorities
With your income and expenses mapped out, identify your budgeting priorities. Rank your fixed and variable expenses by importance, distinguishing between needs and wants. Shelter, food, utilities and transportation likely top the “needs” list. Prioritise paying these essential expenses first each month. Discretionary expenses like holidays and dining out are wants. While allocating for fun is important, limit spending on these categories until after covering higher priority expenses. This helps direct your money where it matters most.
Use the 50/30/20 Budget
A good blueprint for balanced budgeting is the 50/30/20 rule. This allocates 50% of your after-tax income to needs, 30% to wants, and 20% to savings and debt repayment. Following this guideline helps ensure your priorities are funded, while still leaving room for flexibility and financial goals. For example, on a €5,000 monthly income, needs get €2,500, wants get €1,500, and €1,000 goes to savings and debt payments. How you divide your actual budget will depend on your unique expenses and priorities.
Automate & Pay with Purpose
The key to sticking to your budget is making it easy and automatic. Have fixed payments like rent, car payments, and insurance deducted from your pay check or checking account automatically. Set up automatic transfers to funnel a set portion of your pay to savings and investment accounts. Use automatic bill pay for utilities, cell phone bills, subscriptions and other regular expenses. This makes budgeted spending passive and prevents forgetting bills. For non-automated variable expenses, be intentional about when and how you spend discretionary income, such as deciding to devote a set amount to investments each month. Use cash envelopes, choose cheaper options, or say no to purchases outside your budget.
Re-evaluate & Adjust
Building in flexibility is crucial for budgeting success. Revisit your budget monthly to see if adjustments are needed based on changing income or expenses. You may need to cut back in some areas that are over budget. Or you may have room to increase budgeted amounts for priorities like debt repayment or saving for an important goal. Get in the habit of reviewing and revising your budget to ensure it remains realistic.
Make Budgeting a Habit
Consistency and discipline are vital in mastering the art of budgeting. Make working on your budget a habit, like checking it weekly or the first day of each month. Tracking your income and expenses will get easier with time as it becomes part of your routine. You could even make budgeting fun by challenging yourself to beat your own goals each month. Developing the discipline to budget regularly is what transforms budgeting from a chore into an empowering tool for managing your money.
Follow this monthly blueprint to get your budget started on the right foot. Stick with the process, adapt as needed, and budgeting will become second nature. Consistent budgeting gives you power over your money, enables you to pay needs first while still having room for wants, and helps pave the path to achieving your financial goals. Master the art of budgeting and your money will be working optimally for you.
