Many think that budgeting is for financial maestros only. They are under the impression that you need strong capabilities for making a budget and following it. However, that is not the case.
Making a budget is easier than you think. You don’t have to be Warren Buffet to make one, and you don’t need to deprive yourself of following it.
The trick is to get started with this foolproof guide to budgeting.
Understand Your Goals
The first step is to understand your goals. You should know why you are budgeting. Being conscious of your goals will motivate you to follow your budget.
Remember, budgeting is not just for people who are broke or bad with money. Budgeting is for everyone. We all need to do it. It could be to save enough for retirement. Or it could be to pay down debt.
Budgeting is necessary because it helps you effectively manage your money so that you will be financially independent. You need to keep these facts in mind for successful budgeting.
You also need to consider how much money you intend to save each month from the budget. You may want to start small and then aim for bigger amounts each month for successful budgeting. So you could go up from $300 to $400 and then move on to $500 and so on.
If you have a debt to pay off then, this amount will be your money debt payment. Since you are likely incurring high interest on debt, you cannot afford to save money unless and until you pay off the whole debt amount.
Assess Your Income
If you are earning a fixed salary, then assessing your income may be simple. However, you will also need to factor in part-time work, if any. Keep this in mind since you may have to earn part-time as part of the budget.
Calculating your income may be more challenging if you have a small business. In this case, you will need to take the average monthly amount that you earn.
Calculating expenses is more challenging than assessing income. Many people simply don’t know where their money is going.
First, take note of fixed payments like rent, subscriptions, insurance premiums and mortgage payments.
Now you need to tackle variable expenses like eating out, groceries, shopping and so on. The best way to understand such costs is to note down every transaction without fail, no matter how small. So don’t forget to note down the smallest costs that you don’t give a second thought. For instance, coffee, if you pay for it, it must go into your records.
You will need to track your costs over one to two months. Then you will have a better idea of your variable expenses.
Many people underestimate their variable expenses. So you must track such costs to be more precise.
Subtract Costs from Income
To find out how much you are saving, subtract all costs from your income.
This is the starting point of your budget. Your goal should be to keep increasing this monthly saving amount.
But what is the maximum amount that you want to save each month? That depends on how much you want to have in your retirement fund.
Suppose you want to make a million dollars using stocks. You can invest in ETFs and index funds to mitigate the risk of stocks.
The average historical rate of return (after factoring in the biggest financial catastrophes) for stocks is around 10%.
However, we will use a more conservative 8% average growth rate to determine how quickly you can make a million with stocks.
This chart shows you that if you save a modest $500 each month, it will take you about 33 years to make a million. But if you want to be a millionaire in under 2 decades, you will need to save an aggressive $2,000 per month.
Keep Aiming Higher
As you can see, if you want to save a substantial amount in a relatively short time, you will need to save more and more money each month. The budget will help you do that.
Once you track your costs, you will know how much you are spending on groceries, dining out, shopping and other costs on average. For each successive budget, aim to bring down these costs gradually. Make sure that cost-cutting is gentle so that you can stick to it. You will need plenty of forbearances to bring down costs substantially. You can make that happen with gentle and gradual cost-cutting,
Pay Yourself First
Set a fixed amount of money that must be automatically deducted as soon as you receive your paycheck. This will exponentially improve your chances of staying with your budget. For you, do not risk spending this money once it goes into your retirement fund.
You can configure your account to transfer a fixed amount of money at the start of each month towards your retirement funds.
No budgeting endeavour can be complete without the Doctor Money App – the smart app for smart people that helps you to save more. The truth is that many of us fail to stick to the budget. Hence, you need a smart app that will help you make better financial choices and save more.
With the Doctor Money app, you have a much better chance of sticking to your budget. You will feel more relaxed and no longer guilty for mismanaging your money and failing to meet your budget.
The Doctor Money App is designed to gradually save more and more money so that you meet your budget, save more for the future and live a carefree, financially independent lifestyle.