How to Make a Budget — And Stick to It
Most of us know the importance of budgeting, after all, we want to be in control of our own personal finances. But some of us find it overwhelming to set a budget. And for others, after finally plucking in the numbers, wonder where their money has disappeared to by the end of the month.
Budgeting need not be complicated. Here are some tips that make budgeting simple and help you gain better control of your personal finances:
#1 Save First, Then Spend
Whether it is saving for a rainy day, or saving for an upcoming large expense, savings should be a key component of your budget. But if you are like me and lack the discipline to save, you may find that whatever amount that is left by the end of the month does not match up to the amount you have planned to save.
A really simple way to help you hit your savings goal is to save first, then spend. Once your pay comes in on payday, immediately transfer your planned savings amount to another savings account. This savings account should be a separate bank account. Keep that bank card at home so you won’t be tempted to touch that money when you see a really nice dress while out shopping for groceries. But also keep that card somewhere that is not too out of reach in case of emergencies. This will help to prevent you from overspending.
If you are saving with a goal in mind, rather than putting your hard-earned money in savings accounts with a really low interest rate of 0.05%, you may wish to consider endowment plans.
An endowment plan is an insurance savings plan and is in a way forced savings as a sum of money can be auto-transferred on a regular basis over a period of time. Endowment plans can generate a return of 2% p.a., much higher than a regular savings account. Most endowment plans are mid to long-term, with policy terms lasting as least five years and up to 25 years. If that sounds like too much of a commitment to you, there are short-term endowment plans that mature in two or three years. Remember to do your homework and compare plans that help you meet your financial goals.
#2 List Your Expenses and Keep your Budget Flexible
Start by identifying all your regular monthly expenses. List your fixed payments like mortgage or rent, utilities, mobile phone bills, and other bills. Then list your essential expenses like food and transport. Next, allocate amounts for recreation and personal spending. What plans do you have in your calendar for the upcoming month? Take into account expenses like birthday celebrations and gifts. If you give regularly to charities, include those amounts into your budget as well.
While you stick to your budget, it does not mean you cannot spend money on something that you have not planned beforehand. If you really want to get that nice dress but have already hit your budget for clothing, reduce spending in another category. Or perhaps you are mostly working from home and do not need to spend as much on transport, but more on food deliveries. Be realistic and be flexible when you make a budget. You are in control of your own budget.
#3 Use Zero-Based Budgeting
If you have ever heard of finance guru Dave Ramsey, you would have come across his method of zero-based budgeting. It is a no-brainer method of making sure you know where your money goes to. You are basically, in his words “giving every dollar a job to do”.
The idea is simple: Income — Expenses = Zero
By adding your income into your budget and allocating every single dollar to different categories, your goal is to reach zero at the end of the month. If you have money left over, you must tell that money where to go, be it towards your savings account or upcoming bills. When you account for every single dollar that comes in and out, you are less likely to overspend and more likely to be in control of your money.
#4 Use A Budgeting App to Track Expenses
A budgeting app is a convenient tool to track your money real-time. If you are an expert at using Excel spreadsheets but lack the discipline to key in that $5 you spent on coffee this morning, or that $2 croissant really slipped your mind, you would lose track of your spending easily. Using a budgeting app that is at your fingertips is convenient and you can enter your purchase right after you have made one.
There are tons of apps available for download. Seedly is an all-in-one personal finance app that not only helps you to design your own budget, it also allows you to integrate your bank accounts so you can have a full picture of your finances.
The bottom line is budgeting is simple and you can be in control of your money!
I wrote this article for a finance blog and I had fun collaborating with a friend who inspired some ideas in this piece.