How to Create and Manage a Budget

What comes to your mind when you hear or see the word “budget”? Unpleasant thoughts, eh? It almost sounds synonymous to cutting back on leisure spending like eating out,movie dates, and bar hopping among others. Well, it’s not that scary of a word. It is in fact a lifesaver.

A budget simply shows how much money you have coming in and how much are coming out, and how and to where. Budget is a simple tool towards financial security, and financial success. Why you say? Because it helps you make the most out of your money and track your financial behavior and habits. It will give you insights not just on how much money you actually have and how you spend it, but more importantly, on how you as an individual, treat money vis-a-vis your needs and wants.

Everyone can benefit from creating and managing a budget. A budget gives people a sense of control over their money, which is very empowering. Think of a budget as a financial foundation. Each person’s foundation is going to be different, just as each financial situation is different.

Why Should I Maintain a Budget?

Budgeting can improve your life because it:

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  • Reveals waste. Creating a budget uncovers areas that many people neglect to notice on a day-to-day basis.
  • Directs priorities. It will allow you to look at the big picture of your spending habits and set new priorities to maximize your money’s potential.
  • Creates new habits. When you get a clearer picture of how you use your money, it will allow you to make more conscious shifting of expenditures into different categories and avoiding unnecessary spending.
  • Reduces stress. Finances are one of the top stress-inducing situations. When there is a sense of control over the money coming in and the money going out, the stress can transform into a feeling of empowerment.
  • Educates. Having a budget allows people to view money as a tool, shifting the mindset to focus on long-term goals and future needs.

Creating a budget is the first step, but maintaining the budget is where you start to see real growth in yourself (it’s the most difficult part) and more stretch in your pesos. Sticking to a budget can be a difficult task. It’s important to maintain a positive attitude toward the process.

What’s the best budget system?

There are four basic methods for creating, tracking and monitoring a budget:

  1. The Notebook and Pen: This is the oldest method for budgeting, and it’s also the least expensive option.
  2. The Spreadsheet: Microsoft Excel is the most popular budgeting spreadsheet I know and it is in fact widely used too. With a spreadsheet you can easily organize all the information you want to go into your budgeting format, and it also does the Math for you. MS Excel is in fact my choice. I do invoicing, budgeting, and other bookkeeping tasks in Excel. Also, if you feel intimidated creating your budget format in Excel, you can try surfing the web for templates.
  3. Free Online Software: There are several free web-based software programs that can help with budgeting. Such programs like Manilla and Mint.com allow you to create and group your expenses into categories and track your spending. Works best if you are always connected to the internet and is always on the go. You can access your budget from any device as long as you are online.
  4. Financial Software: There are also financial software programs, but you need to be computer-savvy to use them. Quicken and Microsoft Money good examples of these financial softwares.

How do I Make the Budget?

Budgeting strategies and techniques vary. There will be differences, for example, between a budget for a first-year college student and one for a retiree. In this post, we’ll talk about the five basic steps in creating a budget. They are all important because they build on one another, helping you organize your finances in a sensible way.

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Step 1: Set Your Financial Goals

As for your goals, there are two things you must consider: your short-term goals and your long-term goals.Apparently, short-term goals refer to how you want to use your money today, while long-term goals refer to how you want to spend your money in the future (say the next 5 or 10 years).

Which of these two should weigh more? Well, that depends on you. But it is important to weigh them both carefully.You must dertermine which of these two goals address needs and which covers luxuries or wants. Then, prioritize your financial goals accordingly. To give you an example: Short-term and immediate financial goals include rent, food, phone plans, and household supplies among others. Secondary goals would include clothing, newspaper or magazine subscriptions, and an evening out with family or friends, and of course, getting out of debt.

Luxury goals could include a massage, a family vacation or international travel. Long-range financial goals could also include retirement savings, investments and charitable donations.

Step 2: Calculate Your Income and Expenses

Now, it is time to implement a plan to reach the goals you’ve set in Step 1. The first thing to do is to calculate your income and your expenses. The most convenient way to do this is to compute on a monthly basis as most bills follow a monthly schedule.

Start by making a list of all your monthly income sources such as your salary (minus taxes), or gigs, allowances, and bonuses among others. If you don’t know the exact amount, you can use realistic estimates. Add them up and that would be your total monthly income.

Now, it’s time to list down your expenses. It is highly suggested to use these three general categories: fixed committed expenses, variable committed expenses and discretionary expenses.

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  1. Fixed committed expenses: These have a fixed monthly amount which include your monthly rent, monthly telco plan bill, or your monthly internet bill, or your water and electric bill.
  2. Variable committed expense: These are expenses that vary from one month to the next month based on need such as groceries and fuel or gas.
  3. Discretionary expenses: These are optional expenses and include recreation and entertainment.

Step 3: Analyze Your Spending and Balance Your Spreadsheet

The logic behind budgeting is to make sure your expenses do not exceed your income. However, if more money is coming out than is coming in, then spending habits need to be examined and modified.

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Keep these reminders in mind:

  • Record all your deposits and purchases.
  • Print out your monthly bank statement if you aren’t already getting one in the mail. If you’re doing everything online, there is software that can make this step — and budgeting — really easy.
  • Do your own math for deposits and withdrawals to make sure your bank hasn’t missed anything or taken any liberties with your money.
  • Go line by line and account for any fees you’re charged.

Step 4: Revisit Your Original Budget

After keeping and maintaining a budget book for a month or two, it’s time to revisit it and reexamine the areas you think need adjusting.

Perhaps in your first budget book your initial estimates were off. Or, perhaps you didn’t account for expenses like veterinarian bills (if you have pets), or car repairs (if you have one). Revamp your budget book and make necessary and informed adjustments to make your budget more comprehensive and well-rounded.

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Once you work out all the kinks in your budget, you should be able to stick to it for a length of time. You must manage your budget regularly by accounting for changes in your income and spending needs. It’s recommended you do this every three months.

Note: If you get a promotion, for example, you can increase your discretionary spending as well as your savings goals. On the other hand, a layoff or shorter work hours could mean cutting back on spending until you find a way to supplement your income.

You can also use regular budget evaluations to prepare for your plans in the near future. Some individuals may feel more comfortable cutting back discretionary spending for the month leading up to a family vacation or the holiday season.

Step 5: Commitment

Creating a budget is a great step in working toward a more financially sound future for you and your family. Commit to it. Keep a realistic outlook and evaluate it often and make necessary adjustments when called for. A budget is all about balance, remember.

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Staying motivated can help alleviate some of the pressures of budgeting. Consider setting aside some money each month so you can look forward to a relaxing vacation at the end of the year.

Finally, set realistic goals. Start slowly, building up to a plan that works for you and your lifestyle.