How To Properly Create a Budget

How To Properly Create a Budget

How To Properly Create a Budget

It’s no secret that making a budget can really be a pain. Keeping track of every little expense is an exhaustive and challenging experience that often ends in frustration. But, what if I told you there is an easier way to design your budget? Today, we’ll share a method that is more effective, easier to create and won’t make you hate personal finance.

The Friendly Financial Coach offers non-biased financial coaching services to individuals and families. More can be found here.

The Old Way

The old way of budgeting is a passive approach that requires you to pain strikingly monitor everything that you spend. You keep track of every dollar spent and then make adjustments after the spending occurs. Ultimately, this often leads to your financial targets being passively shaped by your current spending habits and not what may be best for your future!

Another problem with this old approach is that it’s unnecessarily difficult. You generally need to keep track of everything spent and then analyze it. Further, if you forget to write something down then all of your work is in vain. Thankfully, the use of online banking can help, but even this can be flawed.

If you successful complete the old budgeting process, then you’re supposed to use this information to create future spending targets. The big question is why would we do all these painful steps when we could just create our financial targets from the beginning?

The New Way

The new way is an easier and more assertive approach to managing your finances. Your finances will be structured around your life goals. Meaning, your dreams and life aspirations are now what drives your finances instead of your spending habits.

As with all financial projections, you can expect months where you’ll need to make adjustments and corrections. This is absolutely normal and it’s not worth beating yourself over. 

So How To Do It?

1.    The first step is to compile all of your monthly income and estimated expenses. You should also breakdown your expenses into needs and luxuries. Needs would include expenses that you cannot go without, like housing costs, groceries, utilities and more. Luxuries would include eating out or other expenses that you could realistically live without.

You should also determine what your random annual expenses are and include them as a savings goal. This includes gifts, traveling and more. This will help prevent any large expense from shocking your budget.

2.    Next, we include your financial goals. These goals are really the foundation of any successful financial plan and properly including them will allow you to financially achieve your dreams.

To include them, you’ll need to determine how much to save to achieve these goals. While we won’t go into great depths here, a simple method is to divide the goal’s future cost by how many months until you want to achieve it.

3.    Then compare your income to your cash outflow, being your expenses and goal savings. You’re good if your income is equal to or more than your cash outflow. However, you’ll need to make adjustments if your cash outflow is more than your income. 

4.    Finally, all that really needs to be done is to monitor this on a semi-regular basis until everything comes naturally. If you overspend or have savings concerns then you can use tricks like designated savings account for that goal, use of physical cash or the savings jar method.

Here’s a link to a basic budget sheet that can be used as a template – Basic Cashflow Statement

Simplifying Personal Finance

That’s the basics for embracing a new way of designing a budget. One that will not drive you crazy and will help you achieve your life goals and dreams.

Thanks for dropping by, please consider sharing it with anyone that would benefit if you enjoyed this article.

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