Creating a household budget generally takes up a lot of effort. However having a budget helps us to set our financial goals, control our spending, pay off our debts faster and increase our net worth. If you are able to set up your household budget you will be able to control your money instead of your money controlling you. A budget gives you a detailed plan on how you spend your money and how much you save. A budget helps you be disciplined about your money. Start creating a budget with your very first monthly salary and continue with this practice, and very soon you will be able to achieve financial stability.
A budget will give you peace of mind because it helps you come up with a clear plan to pay your monthly expenses and debts. You will not be constantly worried about missing the due date of a bill or have to check your bank balance when you are at the checkout line at the supermarket wondering if you have enough money to cover your purchases.
Unfortunately, many Young Professionals today are unable to achieve financial stability even if they earn very high salaries and hold high level jobs due to the lack of planning. Setting up a budget, if done accurately and consistently each month, will help you to become more financially stable.
How to set up a budget
Step 1- Decide what type of budgeting system will be most suitable for your lifestyle.
There are many different budgeting systems out there. Some are computer based and some require only a pen and some paper. Choose which system is most suitable for you. The budgeting system has to align with your future financial goals. It has to be a system which can adapt to your lifestyle and be easy to use. It has to be convenient and not take up a lot of time. It also has to be an uncomplicated system that you can maintain for a long period of time without undue effort. A household budget is extremely personal and unique. A system that works for your colleague or your sister may not necessarily be suitable for you as each individual and each family has different financial goals and financial priorities. Therefore, choose a budgeting system that is simple, that is easy to maintain and that is in line with your financial goals and priorities.
Step 2- Calculate your monthly income
Ideally you must have more than one stream of income. Your salary from your job is your main source of income. It is essential that you know your monthly take home salary. Your monthly income may also include any bank interests, dividend payments, rental income, annuities which comes to you on a monthly basis.
Step 3- Write down a detailed list of your expenses
Tracking your expenses for 2 to 3 months will help you come up with a more accurate list of expenses. It is important to record what you have paid for whether it is by cash, credit card or online direct debit from your current account. It is also important to calculate the monthly amount of expenses that occur annually such as council taxes, income tax and vehicle revenue licenses. Being as accurate and as comprehensive as possible in recording your expenses is key to setting up your budget.
Step 4- Create your monthly budget
After calculating your monthly income and your monthly expenses write down your monthly budget. Write down the due dates of the bills to prevent getting a late fee. Once you have set up an estimated budget make sure to track all your income and expenses monthly and adjust your budget accordingly. Make sure that you prioritize your bills such as mortgage/rent, utilities, medicine and food before your discretionary spending.
Step 5- Cut out unnecessary expenses and automate savings
Living below your means is the easiest way to achieve financial stability. Once you have created a budget it is easy for you to see where you are spending unnecessarily. What you consider necessary is completely unique to you. However these days you will notice that you do not need a lot to live a happy and healthy life. Think carefully and remove all unnecessary expenses from your life. Once the budget is set up it is easy for you to determine how much of your salary that can be saved. Set up an automatic deposit the said amount (even if it is as low as 2 to 5 %) to a separate account which you don’t have easy access to and let that money accumulate over time.
Disclaimer - It is important to note that the above tips are my personal views and opinions on money management. These tips should not be considered as professional financial or legal advice. This information is general in nature, may not be suitable to your individual, financial or legal situation. Always consult a competent and qualified Financial Professionals and a Legal Professional before you chose any investment, and, do all necessary research and understand the risks involved before you purchase any financial product.