Effective budgeting – how to create a budget that works for you
The effective management of your personal finances is the key to your financial independence. No matter if this is new for you or if you have already created a budget, which you have difficulties following, these five steps will help you create an easy to follow plan.
1. Identify your income and expenses in order to understand where exactly are your finances going
Often we don’t actually realize where we spend our money. Usually, there is a noticeable difference between what we think we spend and what we actually do so seeing the numbers black and white, acts quite sobering.
- Fixed expenses – the rent and mortgage cost, utility bills and other obligations that you pay in regular intervals.
- Financial goals – the funds you put aside for pension contributions, in your savings account, for holidays, deposits, etc.
- Variable costs – your everyday expenses, which could be easily managed.
2. Cut your spending
After you identify where you spend most of your finances, you could consider different options for cutting your costs. You could cancel all subscriptions which you actually don’t use or you can downgrade to a more affordable plan. Another option is to renegotiate your mobile or internet contracts or even ask your landlord to lower your rent. In addition, you can refinance all of your obligations and loans and negotiate a more favorable interest rate.
3. Define clear and precise financial goals
No matter if it’s about weight loss, learning a new sport or saving money, the chances of success increase with a clear and precise plan. First define your goals – whether you want to save for your friend’s wedding, for a holiday abroad or for buying a new home? The formula for achieving our financial goals is the same for all of us: saving, paying up our debt and growing our wealth through “smart investing”. Despite this fact, setting clear and precise goals help us be more focused and motivated.
4. Chose a plan that works for you
It is important to choose a realistic budget fits your lifestyle because otherwise you risk quitting after a month. Here are some ideas that work.
The 50/20/30 rule
- 50% of your income goes for fixed expenses
- 20% - for financial goals
30% - for variable expenses
The 50/20/30 rule gives you a realistic view of where you spend most than what is necessary so you could correct your actions. If you are spending more than 30% on variable expenses, for example, for food – this means that you could eat out less. In a similar matter, if you spend more than 50% on fixed expenses, then you might need to compensate for the difference at the expense of the variables.
People love doing what makes them happy. This is why after paying for your fixed expenses think about what brings you joy – is it going away for the weekend or going to the cinema. Give priority to these variable costs that make you pleasure and stop spending for unnecessary things.
First, pay your fixed expenses and you can spend the rest without much planning. This budgeting style is suitable for people who don’t have a problem with excess spending as it is unassuming and easy to follow.
The idea here is to account for each BGN of your income before spending it. For example, you can create a plan that you can follow. This way before making another impulsive purchase you will know whether you could afford it or not.
5. Test different budgeting styles so you could figure out what works for you
It is important to revise your budget often. Take one day from the week to go over your expenses. You’ve spent more in one of the categories or you had unexpected costs?
If a certain budgeting style doesn’t work for you, ask yourself why and try to cut some of your expenses. Experiment with the methods described above or thing of a style of your own. In every case don’t prioritize your fixed and variable costs over achieving your financial goals.