The Importance of Budgeting
What exactly is a budget? It is simply balancing your total income with your expenses. Budgets are so essential for families and for individuals. It lays out the foundation of your financial plans and it is your guide for daily spending.
A budget will help you meet your financial goals. Perhaps you want to save up for that next big family vacation, for a new car or even for a big birthday party for your child. You may have debt that you need to pay off.
Life is too short to be wasting time and money on meaningless things. Having a budget helps to make better spending decisions, to save for your future goals and to take care of your family.
Disclaimer: I am not a financial planner or expert. All information in the post is based on my research, opinion and experiences. Any action you take based on the recommendations from this blog is at your discretion.
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4 Budgeting Methods
The basis of a budget is to have your net income equal your expenses. Let’s say you make $3000 a month. How would you divide the $3000 to pay for all of your expenses (mortgage/rent, food, car loan, debt, savings etc)?
Here are 4 methods to create a budget:
1. Pen, paper and a calculator
Some people may prefer to create a budget using paper and pen.
Pro: simple and you can pin it on your wall
Cons: It will take more time to set up and is difficult to modify.
2. Create your own spreadsheet budget
Create your own budget using a spreadsheet on the computer. You can use the spreadsheet program in Microsoft Excel or Google Sheets to create your own budget.
Using functions and formulas in a spreadsheet will make it easier to create a budget. If you aren’t familiar on how to use functions in a spreadsheet. Take a look at this post: How to use 4 basic spreadsheet functions to create a budget
3. Use a budget template
There are various budget templates that are ready for you to input your numbers. If you have a Google account – take a look at the “Monthly Budget” in Google Sheets. Microsoft Excel has a few too.
Here is an online interactive budget template: Make a Budget Worksheet
4. Online budgeting programs
Lastly, online budgeting programs are for those who want to take it a step further to track spending. Here are 2 different online programs: Mint and YNAB (You Need a Budget).
Here is a comparison between Mint and YNAB
Things to Consider for Your Budget
If you have a difficult time balancing your income and expenses, figure out ways to make it work.
Will you have to make more money? Consider adding a side hustle or asking for a promotion at work
There are always ways to cut current expenses such as cable, cell phone bills, eating out less and stopping unused monthly subscriptions or memberships.
20/30/50 Budgeting Ratio
This is a good place to begin on how to divide your after-tax income and then tailor your budget to your family’s needs.
20% of your income should go towards savings and investments. This includes your emergency fund, kid’s education and retirement savings.
30% of your income goes towards “wants”. This category is for all the things that make life more pleasurable and are not a necessity. Cell phone, cable, electronics, going out to eat, gift and house projects will fit in this section
50% of your income is for your “needs”. The funds here will go towards groceries, mortgage payment, car payment, debt payment and utilities.
Everyone’s financial situation is different and you can alter this 20/30/50 ratio. For example, once your emergency fund is built up you may want to funnel more money towards your mortgage.
Budgets are fluid and adaptable. Once you have set up a current budget, just remember that you can modify it. Life changes and you can always tweak and adjust the categories and numbers as needed.
Debt repayment
Debt repayment for consumer debt should be a top priority on your budget plan. Once the debt is paid off, redo your budget to shift the debt repayment amount to a different category (such as retirement savings).
Saving for retirement
Unless you are retired, saving for retirement should always be part of your budget. Even if you have a lot of consumer debt that needs to be repaid, there should be some money that is allocated for retirement. Use TIME as a tool for the compounding interest to work and the sooner you start saving for retirement the better.
Emergency Fund
Do you have an emergency fund? This fund should be at least 3 – 6 months worth of your monthly expenses. This fund should be for unexpected expenses that you did not account for in your budget (such as a major home repair, job loss, illness etc).
Vacations
Remember to include vacations in your budget! Instead of going into debt with vacations, save up for your vacations before you even go. Decide roughly how much money you may spend annually on vacations and then break it down to how much you need to save monthly.
Other budget categories:
Groceries, entertainment fund, life insurance, pet fund, kid expenses, car expenses, gifts, home expenses, utilities, and cell phone expenses.
Budgeting to plan for future life events
Budgets is a great tool for those planned life changes such as getting married, going on maternity leave, or buying a new home.
Getting Married
Weddings can be expensive! There are so many things involved with a wedding that expenses can add up quickly. Add a “Wedding Fund” to your budget and it may take you and your partner several months to save up for this special fund. Start this new phase in your life with your partner by not going into debt.
Buying a new home
When you are looking to buy a new home it is important to know if you can comfortably pay those mortgage payments and other home expenses (utilities, insurance, home maintenance, landscaping, furniture). Buying a home is one of the biggest purchases you will make in your life and so this decision needs to be planned very carefully.
*Create a “before buying a home” budget and “when you live in your new home” budget.
*The before budget needs to have an expense column for saving up for a down payment and for future home furnishing expenses.
*The new home budget should include the mortgage payment, home insurance, property taxes, and home maintenance categories.
This will take some time to plan but it is so worth it. You don’t want to buy a home that you really can’t afford and end up losing it later or go into further debt.
Having a Baby
Having a baby changes the family budget. How will your family adjust to the lower-income for the time that you or your spouse will be on maternity leave? Create a “before baby comes” budget and a “when baby is here” budget. These budgets will help you determine how to balance your finances to incorporate a lower income and new baby expenses.
When you go back to work then your family’s money situation will change again and that will need another change in the budget. It may include childcare fees, contributions to an education fund and a growing grocery budget.
Related post: How to Financially Prepare for a Baby
Budgeting is a plan for spending, saving and it helps you achieve those monetary goals that you have set. Budgets are so essential to help you plan for those future life events for you and your family. It is worth the time that it takes to create and to maintain. You control your money rather than letting it control you.
Have you created a budget? How has it helped your family?
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