On the light of promoting financial education, our articles focused on helping households on how to save and invest for long term, pay off credit debt, put the right insurance in place, and make decisions around equity compensation. Therefore, to achieve our goal of enlightening the households with aim to reach financial freedom, this article is focused on how to budget.
Although some of the households typically generate high income, but most of them need help planning a realistic budget, which is more sustainable and does not feel like difficult to implement.
The following are most important steps on how to plan a realistic budget:
1. Before planning for a realistic budget, you must review spending to get estimates for each category
Reviewing and looking back at every transaction over the last period, at least a month, to get some good estimates for your average monthly expenses. In addition, list out any expenses you anticipate over the next year, like property taxes, vacations, holiday gifts, and annual donations, and make a plan for how you will pay for them and perhaps eliminate some expenses to save a little amount over time.
It is advisable that you use budgeting software to easily see the average monthly spending and use transaction filters to identify larger, less frequent expenses over the last period.
2. Tracking all your income and expenses
Sometime people might claim that there are primary problems with an overly detailed budget. For instance, it can lead to feeling micromanaged every time you spend with very little flexibility. Second, maintaining an overly detailed budget can be time-consuming and difficult to keep up with over time.
However, we strongly recommend that you must record every detail of your spending. In order to effectively budget and stick with it for a long term. This will not only make it easier for you to keep track and categorize expenses, it will also give you more freedom to live in the moment and have some flexibility within the broader boundaries of your budget.
3. Save as much as you can
Some might give you a wrong advice or saying saving for your future is important, but it’s not more important than your life today. However, the fact is saving is important and you can even start saving at less one percent of your income, increase it gradually until, for instance 15 percent, and stick with it for a long term.
Instead of saving until it hurts or planning an realistic budget, you can focus on finding the right balance between spending on what is important for your life today and saving for future, so that you can make sustainable progress over the long term. It is important to start small and increase your savings rate over time to get used to it and make it sustainable.
4. Sort your expenses by needs versus wants and eliminate wants
Looking at your expenses through the lens of needs versus wants requires you to judge each and every spending decision as required. This judgment-based filter on spending often results in feeling guilty about spending, and creating a budget that cuts out all wants means that staying on budget will be sometime difficult to implement for a long-term.
Although you must review every expense as a need or a want, but also you can filter your spending through a different lens called cost-per-benefit. Cost-per-benefit is a way to assess how much value you derive from every dollar spent. As you look for ways to reduce spending and save money for your goals, consider keeping expenses that provide high value per dollar spent, and look to eliminate expenses that provide lower benefit per dollar.
A realistic budget gives you the freedom to enjoy your life, and balances your life today with saving for the future.
5. Set realistic goals
One of the most important element of planning a budget is to make a list of your short-term and long-term financial goals. Short-term goals should take around one to three years to achieve and might include urgent spending, such as building an emergency fund or paying debts. Long-term goals, such as saving for retirement or your child’s education, may take decades to reach.
6. Review your budget regularly
Once your budget is set, it’s important to review it and your spending on a regular basis to be sure you are staying on track. You may get an income raise, your expenses may change or you may reach a goal and want to plan for a new one. Whatever the reason, get into the habit of regularly checking in with your budget following the steps outlined above.