Everyone should manage their personal finances in line with what they earn so that they can effectively balance their needs (and wants). Circumstances for everyone are different and everyone must spend their money wisely to ensure they do not spend more than what they have.
What Is a Budget?
In simple terms, Millennial Money defines a budget as “an estimation of revenue and expenses over a specific future period of time and is usually compiled and re-evaluated on a periodic basis.” It is therefore an informed breakdown of what you earn vs. what your expenses are.
In this article, we will explore what it is you need to know about a budget so that you can become more informed about managing your finances successfully.
Why Is It Important to Budget?
People usually don’t like to talk about money, and financial illiteracy is often the cause for a lot of financial strain. Fortunately, by having a budget it doesn’t have to be.
By breaking down barriers around talking about money and making a budget, it enables you to make better decisions both independently and as a household. It will also allow you and your loved ones to form realistic expectations of life goals and other things that require money as everyone will be onboard (education, housing, transport, etc.).
Consequences you could face if a sound budget isn’t drafted and implemented could include leading to a bad credit record. Unpaid bills and/or loans can negatively contribute to your credit score and this will be an impediment in future should you require credit for a house, car, education, or even an emergency.
What Should a Budget Include?
Although a budget is a deeply personal and customized plan, there are some generally accepted best practices of what every budget should, at the bare minimum, consider including. According to the Balance, budgeting has many benefits and one of them includes putting you in control of your own money.
A Full Breakdown of What You Earn
Most people will earn a salary or pension which makes the budget drafting process simple. Some people work on a commission or rely on investments for their livelihoods. No matter what the source of the income, it is important to write down what it is you realistically expect to earn.
Never overestimate your income as this can result in serious clashes should you have more expenses in a given month than what you had planned for.
A Realistic Outline of All Your Expenses
Expenses listed in your budget should first include the things you consider as the most important (i.e. housing, food, transport, etc.). Then you can add expenses that are moderately important, and lastly, non-essential.
Always Set Aside Money for Emergencies
Life has always been and will continue to be unpredictable and it can often include financial pressure simply because proper planning hadn’t been done. This kind of money isn’t savings; it is money set aside with the expressed purpose to cover any expenses you didn’t plan for.
This can include things like:
- Flat tire on your car that needs to be replaced to ensure you can travel to work
- A co-payment for medical expenses when you or your loved one needed medical attention
- Emergency plumbing or electrical repair work at your home that is not covered by your insurance or if you do not have an insurance for such purposes
- Broken appliances and furniture or even your bed due to water leaks, unexpected breakages, or general decay that does not relate to an insurance claim
- Education related expenses (normally at the beginning of the year)
- School uniforms (if applicable) can be expensive
- Stationary (some schools have very specific requirements)
- Registration fees
- School trips
- Sports gear and much more
- Although we try and avoid this, we sometimes need to pay more taxes than expected
Savings for the Short, Medium, and Long Term
Saving for a rainy day should be something we all do. You really appreciate it when the time comes that you need to rely on it.
Savings should also be categorized, as we all have different financial needs based on where we are in our lives. To simplify this, let’s look at examples of short, medium, and long-term savings goals:
- Short-term savings can include a well-deserved holiday or that large television you have been waiting for
- Medium-term savings goals could include saving for your child’s education or the deposit for a new car or home
- Long-term savings are generally aimed at retirement, so that when you cannot work anymore, you have money set aside to keep you going
Goals and Sober Evaluation “Check-in” Periods
Setting up a budget and sticking to it is hard enough, but doing regular evaluations is not. As mentioned earlier, the topic of money isn’t always comfortable. Questions you need to consider asking yourself when evaluating your budget could include:
- Do I really need a new mobile phone, and can I derive the same benefit from a more affordable plan?
- When was the last time that I checked if there are more affordable home insurance or car insurance options out here?
- Do I need to consider moving into a more affordable home?
- Should I perhaps look at a more economical or affordable mode of transport?
- Do I have any expenses that I could really do without?
Budgeting Tools Available to Help You
Your Local Bank
You might be surprised to hear that many banks and payment tools offer free budgeting and other financial resources to their clients. This helps you to track and manage your spending to help you see where you can channel your money towards better options.
Free Budgeting Tools Available on the Web
This is but a tip of the iceberg of what is available, but there are so many well-designed tools out there to help you manage a successful budget. Examples according to Forbes magazine can include:
- YNAB (You Need a Budget)
- Personal Capital
- Spreadsheets, and so much more
The best thing to do when setting goals for your personal finances would be to do your own research. Then find the best solution that speaks to what you need. In the end, you will be able to become even better at managing your finances and unlock possibilities you might never have thought of.