Creating a budget and sticking to it is always tough. It is one of those things that is always on your to-do list, and even when created is merely just something on paper, not something you follow. This is because budgeting can be restrictive and time consuming.
The basic premise for a budget is to spend less than you make! This is the one concept that I have come to understand that rich people understand and poor people do not. You simply have to spend less than you make to increase your networth!
So how do you create a budget that ensures your financial success and is relatively easy to follow? Read on for steps for financial success and use my free template to help you get started: DOWNLOAD: FREE MONTHLY BUDGET TEMPLATE
- Know what you spend your money on:
Spending can be mindless and sometimes you do not even realize where your money goes. In my experience, using applications like Mint to track your spending helps a lot as it can be really revealing. For example I found out that I spent over $700 on Uber last year…
If you’re one of those rare creatures that don’t have a smart phone, going through your bank statements from the last 3 or 4 months to determine all you’ve spent on is an alternative.
A good guideline is the 50, 30, 20 Rule:
50% of after-tax income towards needs
30% towards wants
20% towards savings/ retirement
However, my ratio is a bit different, as my goal is financial independence. Currently, I allocate:
30% towards needs, 10% towards wants and 60% towards savings/retirement. This is not because I have an astronomically high income (my income slips beg to differ). The reason I am able to do it is because I have a goal of financial independence I am working towards, which I hope you are also working towards.
Since you did not wake up this morning as the winner of the PowerBall Lottery (and are unlikely to ever win it, sorry to burst your bubble- it is important to prioritize?
So how can you prioritize? As David Bach says in his book “Smart Women Finish Rich”, outline what your values are to know what things are important to you. There’s no point of having money if you can’t spend it on things meaningful to you.
Eg. In order to spend only 20% of my income on wants, I cut out monthly manis and pedis from my budget, and I now do them myself. However, my close friend can’t do without her monthly manis and pedis and has instead opted to do her hair by herself because she is good at it. I’m hopeless when it comes to this so I need all the help I can get. Figure out what is meaningful to you, and what you can do without to better allocate your income.
This is also a time to think about your savings goals: Not all saving goals are equal. If you allocate 30% of your income towards savings for example, the more important goals should come first. These are usually, retirement/ investment goals, school loan repayment, building an emergency fund and possibly getting a car. Other savings goals such as travel or a new Macbook or whatever new iPhone is out, should come next.
The only way you’re going to save is if you automate the transfers. Use a different bank account for your savings and for your daily expenses, and only take around the bank card for the account with daily expenses. Set up automatic withdrawals so you do not have to think about it. Or you can go to HR and ask them to do this automatically! This would ensure that you are not tempted to spend the money you should save, keeping you on track with your financial goals.
Track your success (or lack thereof). Sometimes you might have budgeted too little for certain items or you might have spent a little more than you should have. Whatever the case may be, it is important that you track your progress every month and adjust your budget accordingly. For example, if you notice that you budgeted $200 for groceries and you keep on spending close to $300 this means that you might have to get better deals or you might have to increase your grocery allowance. For tracking my progress, I use Excel and Mint, or plain old pen and paper.
I have inserted a free budget template to help you create a budget that works for you.