10 Useful Tips for Planning a Budget

Why is it important to plan a budget?

Creating a budget to help you plan out your expenses over a certain period of time is a habit that can help you make better financial decisions. Some of the ways in which planning a budget can improve your life include:

• It helps you work more efficiently toward achieving your long-term goals.
• You are more likely to be prepared in case of a financial emergency.
• It limits your bad spending habits by making it easier for you to spot them.
• It prevents you from spending outside of your means.
• It can lead to a more financially stable retirement.

Tips for setting up a budget

A monthly budget is a financial tool that you use to plan your monthly spending and saving, but it’s also a way to analyze your spending habits. Here are 10 tips for creating a feasible budget and following through with it:

Examine the reasons why you need a budget

Although most people do not live by a strict budget, doing so is generally a good idea that can help you efficiently organize your spending. However, thinking about your motivations before planning a budget can help you devise effective strategies to achieve your specific financial goals. Most people start planning their budget for one of the following reasons:

• They’re looking for ways to reduce unnecessary spending.
• They want to save money.
• They want to pay off any outstanding debts.
• They have ambitious long-term financial goals.
• They want more control over their finances.
• They want to improve their credit.

Know exactly how much money you make before planning your budget

Before planning a budget, you need to know exactly how much money you can spend each month. This means that you have to add up all of your income sources, like your primary job, any potential side jobs, passive income from past investments, income generated by your business and others. If your income varies from time to time, find an average monthly income that you can base your budget on.

Create your budget around your longer-term financial goals

Although the decision to implement a budget may be based on short-term requirements like the need to spend less money each month, a budget must also factor in longer-term goals, like saving up for an emergency fund, buying property, paying off debt, saving for vacations, saving for retirement or other similar goals. It’s best to be as specific as possible with the money you need to raise for these goals and the deadline for each, as these will motivate you to stay disciplined and focused.

Find ways to track all of your expenses

One of the most important things to do when planning a budget is to know exactly how much you are spending each month and on what. You can usually do this by tracking all expenditures over at least a month. Here are a few ways you can track your expenses:

• Use a tracking app. Several apps can connect directly to your bank accounts and credit cards and track your expenses by placing each type of spending in a category. Over time, they generate various reports and statistics to help you figure out how much you spent in a certain period of time and on what.
• Directly examine your bank statements. If you prefer to track your spending manually, you can simply analyze your bank statements and separate expenditures into different categories. However, it may be challenging to remember what each expense was.
• Write down all of your expenses. The most efficient yet challenging way to calculate your expenses is to use a notebook or a spreadsheet app on your phone and manually write down every single expense. This is more time-consuming than the other methods, and you need to have the discipline to remember to write down every expenditure, but it’s usually the best way to properly understand your spending habits.

Remember that not all expenses are predictable

After determining what your usual expenses are over a certain period of time, you also need to discover how much you typically pay for irregular events, such as holidays, gifts, property taxes, insurance, medical exams, car inspections and more. The easiest way to do so is to review bank statements and credit card statements going back at least a year and look for irregular expenses.

Decide how much you want to save each month

If your budget plans include saving up for various future goals, you need to clearly determine how much of your monthly income goes into each goal. You can do this by first determining how much of your income you want to save each month and then dividing that amount according to your priorities.

Discuss the budget with your family before making any decisions

Single people can solely focus on themselves and their own needs, but if you share income and expenses with your family or life partner, you need to work together to plan your budget. It’s important to make sure that you agree about expenses and financial goals.

Create a buffer for emergencies

When you’re planning out your budget, it’s a good idea to create an extra category for emergency expenses. While you can’t plan for these unexpected expenses, you can still prepare for them by setting aside some extra cash for emergencies. You could call this category “miscellaneous” and use it only when necessary without having to take money away from a different part of your budget.

Have realistic expectations

In order to implement your plan successfully, it’s important to create a budget that isn’t too tight or challenging to stick to. It’s best to carefully assess your expectations and create a budget that will give you enough freedom to live without worrying about your expenses.

Constantly review your budget

If you managed to create and implement a budget, the hard work is already done. However, the budget you created based on past habits likely needs adjustments over time as you gradually discover ways to make it more efficient. Your income and expenses are also likely to change periodically, so it’s best to review your budget at least once every month or two. This will make it more efficient and realistic, allowing you to put your money to better use.