Budgeting is simply the process of allocating available money towards meeting financial needs in the hopes of avoiding a financial crisis. We all budget in one way or the other, but our ability to manage our finances is dependent on the quality of your budgeting skills. Human wants are unlimited but the resources available to meet those needs are usually limited. If you don’t make a budget ( and stick to it) you’ll most likely be spending money on every expense that surfaces and you might not have enough money left over for the most important expenses. Read on to uncover actionable tips on budgeting like a pro.
1. Know your income sources
The first point of action for effective financial budgeting in personal finance is to know all of your income sources. You can’t spend the money that you haven’t earned in one way or the other. Your primary source of income will be the wages/salary you earn at your day job or business if you are self employed. You’ll also need to account for the money you make from your investment activities. You might also get additional income in form of tips, child support, pension, alimony, SSI, and even checks from the IRA.
2. Know your expense streams
Secondly, you’ll need to account for your expenses by figuring out how much money flows out of your pocket each month. Your expenses can be divided into two broad types; namely, fixed expenses and variable expenses. Your fixed expenses include mortgage payments, auto loans, insurance premiums, and personal loan payment among others. Your variable expenses tend to fluctuate along a spectrum from one month to the other.
Variable expenses include food, consumer items, and utilities such as gas and heating bills. However, you can make guestimates on your variable expenses based on your past spending patterns. You can also chose to stick with the estimates when you spend money and you can adjust the estimates up/down depending on the state of your finances.
3. Calculate disposable income
Many people often erroneously make budgets on their gross income instead of their net income. Hence, when they get paid, the cash they can actually spend is much lower than the amount they’ve expended in their budget. Your disposable income is simply any amount of money left over when you subtract your taxes and legal liabilities from your income. You’ll need to write down all your income sources and then you’ll write down all of your taxes and other liabilities.
It is easy to make mistakes when trying to calculate your disposable income manually because of the multiple bases you’ll need to cover. A net to gross paycheck calculator can come in handy for quick and stress-free calculation of your disposable income. You’ll need to account for your filing status, state and local taxes, Federal income tax. You’ll also need to account for other expenses such a 401(k) or 403(b) deductions, insurance, social security and Medicare.
4. Consider budgeting with an envelop
Budgeting is one of the smartest ways to spend within your means so that your money goes towards stuff that will give you the best value for money. If you can’t seem to commit to staying within a budget for your expenses, you’ll always find it hard to stretch the dollar effectively. However, you can improve your budgeting skills by adopting the envelop budgeting method.
Start by writing out your budget using a scale of preference to allocate money to the most important expenses. Next, get an envelope and write out each of those expenses on individual envelopes. On payday, divide up your disposable income into envelops for each of the weekly/monthly expenses Grocery money should go into grocery envelop, gas money should go into gas envelop and you should do the same for other expenses such as utilities and pets.
As you begin to spend money each week month, you’ll have a visual understanding of your financial position to know if the money left in the envelops will be enough to cover each expense until the end of the month.