In this article we’ll discuss the third part and the next 2 essential steps in the basics of securing a financial future. After we went through the essentials in paying yourself first and how to do it successfully, we will be talking all about creating that plan that you will commit to as far as managing your income and expenses are concerned. That plan is called the budget.
A budget needs some key elements in order for it to become a successful battle plan in the war for wealth. The simple, yet ultimately important rule is not to spend more than you earn and this needs to be clear on your budget. To keep track of that your budget needs to have these elements:
- A time period to set your budget parameters
- An accurate depiction of your income, list only income that is definite to come in. Your paycheck is usually a reliable source to list here.
- A very detailed list of expenses that you will be spending in the coming time period.
- A difference of income and expenses to give you an outlook of the upcoming budget period.
Now that you know the essential components of a budget, you’ll need to follow these key tips for you to get a nicely planned budget that you can stick to. Getting those 2 accomplishments along with our earlier habit of paying yourself first will start you off into the steps to a solid financial future.
Set a Reasonable Time Period
When putting together a budget it is essential that you have the flexibility to adjust it and at the same time have the capability to compare what you planned to actual expenses. With this in mind, it would be difficult to set up too long a period of time for putting a budget together. There’s a reason why almost everyone uses a monthly budget and because that time frame works for them, a biweekly budget also works too if needed.
Be Sure About Your Income
Your budget takes its lead from the level of income you bring in. Make sure to place only the aspects that you are sure about in your budget. If you are working on a joint family budget, make sure the same applies for your significant other’s earnings. If your earnings are more variable based on your business’ performance, commissions or seasonality, key in the most conservative assumption you can. If you earn more than that, then consider it gravy that you can plug right into savings for you.
Determine the Absolutely Necessary Expenses
When you categorize your expenses you need to be sure to really evaluate and think what is absolutely necessary. Think of expenses that will help ensure your basic survival needs, get you the opportunity to earn money and allow you to grow and develop. The obvious examples of these are expenses for housing, transportation and utilities. Your food budget if categorized just into “groceries” can get tricky as sometimes you shop for luxuries in groceries. Separate the groceries category into daily food that shows just what you need to spend to make your 3 meals a day and maybe a snack or 2. A general rule of thumb would be to get the absolute necessities at 50% or less of your take-home income. Since you paid yourself off, that’s a good number to start off with.
Spread Big Expenses Out
If you have big expenses that you know of in the coming year, it’s always best practice to spread these out during your different budget periods. This will allow you to prevent shocks to your budget when that expense comes in. For example, if you need to pay for a business license or a lease renewal later in the year, spread that out across what your budget period is. So if your budget period is monthly and that forecasted expense is 10 months down, divide it up by 10 and include it in your monthly budget and make sure not to spend it!
Plan for Something Nice
Set some rules in place and plan for something nice in your budget, but do so only after you are absolutely sure that the necessary expenses have all been covered. Put in a reward system, for example, if you were able to stick to the budget for the last period put in an extra dinner in there or a small trip to a nearby spa or resort. It is essential that you put in something nice to keep yourself entertained and feeling taken care of to avoid a feeling of deprivation. Studies have shown that depriving yourself will lead to extreme behavior and make you lose all the ground you’ve gained.
Make Adjustments Scientifically
There’s a reason why your budget is written on a spreadsheet or on paper and not in stone, you need to be flexible with it. Make adjustments on your expenses after seeing a trend in the wrong direction. Study how your spending patterns are and try to find ways to minimize further unnecessary expenses on it. Now that everything is laid out it becomes quite easy to look at where you can make improvements.
These steps may appear to be long and exhaustive, but like everything else in the discipline of creating your financial future it is essential to develop these habits that will make it easier and second nature to you. Keep following through, stay on the course and that dream of achieving financial freedom will soon be within your grasp.