The New Year brings many different goals and resolutions. Of which, properly managing your finances tends to be a recurring popular goal many people are interested in setting and achieving.
Managing your personal finances can be, without question, challenging. If you’d like to take more control of your finances, you need a budget, and will need to follow various budgeting tips.
Let’s cover some of the most sustainable ways you can manage your finances, and review the best budgeting tips you’ll read this year!
How to Make a Budget
The first step of managing your finances is to create a budget. There’s no way around it, you need a budget.
Envision a budget being a roadmap. You can only get so far without having an end goal in mind. The budget still allows you to stop to see attractions along your road trip, but you know exactly where you want to end up when the trip is over.
There are a few main categories to consider in your budget:
- Income – Income can come in many different sizes. It doesn’t matter how little or how much you make, everyone should budget their money based on their net income.
- Fixed Expenses – Common items include rent, mortgage, electricity, groceries, insurance. These are the expenses you can’t live without.
- Variable Expenses – Variable expenses are items or expenses you could live without, but enjoy spending money on. For example eating out, clothing, and luxury spending (such as getting massages, buying a coffee at Starbucks everyday, or a membership to a high-end gym)
- Investments – All budgets should also include how much money you can allocate to investments each month.
- Savings – Your budget should also include how much money you should save each month.
There are various ways you can make a budget. If you’re curious how to make a budget, you could leverage one of the best budgeting softwares, or best budgeting apps. Additionally, you could go with a more traditional route and manage your own finances and budget via spreadsheet.
What Makes a Good Budget?
What makes a good budget? A budget allows you to set and achieve your goals, and position you for financial success. There are a few key characteristics every budget should have.
Flexibility Is Key
First and foremost, a budget should be flexible. You do not want to have a budget that is so restricting you simply cannot follow it.
Additionally, your budget isn’t a crystal ball into the future. You must account for some unexpected costs; such as your car breaking down or needing to replace an appliance in your home.
There are always errors in the budgeting process as it’s impossible to predict future needs or demands of money. So, be sure to account for a margin of error.
A Good Budget Is Made Rationally
One of the best budgeting tips is to simply keep your budget rational. Just like a proper meal plan, it shouldn’t be so strict that you cannot follow it long term.
If you know you absolutely love the gym you belong to that costs $100 a month, and couldn’t imagine living without that membership, that’s okay! Find savings in something else so that you have room for the things you love.
Covered Fixed Expenses
Your budget also must cover all of your fixed expenses. These expenses are a necessity to life.
Even though the amount may change slightly from month to month (such as gas or grocery expenses) you still need these items to survive.
Things to Avoid When Budgeting
Just as there are great budgeting tips to follow, there are also things to avoid when building a budget.
Everyone wants tons of money, but you must be realistic with yourself. Don’t plan on having $500,000 in the bank by the end of the year if you currently have $50,000 and earn $85,000 a year.
You should set goals, and the goals should force you to stretch, but you should also be able to hit your goals, or come very close to them. If not, you could easily become discouraged and avoid managing your finances.
One of the components of being realistic is to not under estimate your expenses. Although you’re unable to predict all future expenses, you should set realistic standards for yourself.
For example, don’t estimate that you spend $500 a month on groceries. Look back on the trailing 3 months to see what you actually spent; maybe it was $350, $250, and $400. Having accurate figures is a key component to managing a successful budget.
The personal finance world is filled with terms and definitions that are foreign to those who don’t work with money management or personal finances everyday. If you find yourself struggling to understand some of the definitions or formulas, reach out to a financial advisor so they can help educate you along the way.
6 of Our Best Tips for Budgeting
Now with the basic DNA principles of budgeting out of the way, here are some of our best personal budgeting tips.
Always Start With Fixed Expenses
First and foremost, you’ll want to have an exact understanding of your fixed expenses, also known as the expenses you cannot live without. Once you have that figure, aim to have at least 3 months of fixed expenses saved at all times.
Remember to Adjust Your Plan
Remember your budget is dynamic, and must be adjusted overtime. Things such as inflation, income fluctuations, and expense fluctuations can change your budget and financial picture.
As life adjusts around you, be sure to adjust your budget accordingly.
Prioritize Your Goals
One of the best budgeting tips is the fact that you need goals. After all, what are you budgeting for?
Do you want to buy a house, pay off debt, go back to school, or travel for an extended period of time? These goals will keep you motivated.
Understand Your Financial Situation
Be honest with yourself and your current financial situation. If you have a spending problem, don’t lie to yourself and pretend that problem doesn’t exist. If you have an income problem, put a plan in place to elevate your income overtime.
Eliminate and Avoid Debt!
Debt can be paralyzing! Your budget should have a plan in place to eliminate the debt you currently have. Additionally, your plan should be to avoid future debt wherever possible.
Budget What You Have, Not What You Think You’ll Have
Another budgeting tip would be to budget what you have, not what you think you’ll have. Getting caught up in what you believe you’ll have at a future date can lead to financial distress.
Build a budget based on what you have, and what your expenses actually are.
Why Is Budgeting So Important
Why is budgeting important? There is no shortage of reasoning!
Of which, the most important reason why you need a budget is so you can achieve financial freedom and flexibility. A lack of a budget can lead to bad spending and saving habits, and that is not a good path to follow.
Managing Your Finances Can Be Tough
Without question, managing your personal finances can be challenging. Not only do you need to ask yourself the hard questions, you need to be completely honest with yourself and hold yourself accountable.
Following budgeting tips can keep you on course, but it never hurts to have a second pair of eyes guide you on this process. Working with a professional financial advisor is a great way to ensure you are adhering to the various budgeting tips outlined above, and sticking to a plan.
A financial advisor will do more than just hold you accountable. They will diversify your risk, and help you find investments that can generate higher capital appreciation and consistent cash flow.
Absolutely! In fact, both Google Sheets and Excel have personal budget templates you can follow, all you’ll need to do is plug in your personal expenses and income.
If you’re not a big spreadsheet fan, don’t sweat it! There are plenty of apps you could download on your smartphone that make budgeting easy.
Absolutely not! A budget isn’t designed to eliminate the fun things in life – after all, life needs to be lived.