How to: Plan Your Budget
Every great financial plan needs a sound budget. Basically, it’s a detailed description of what money is coming in and going out. If you’re trying to pay off bills or save for a dream vacation, you need to seriously consider ways to set up a budget that suits your goals. Follow these steps to get where you want to go.
Set specific goals
Use the good old SMART scheme: your goals must be [S]pecific, [M]easurable, [A]chievable, [R]elevant, [T]ime-bound. Write down, what you want to achieve, by which means and within what time. A Jedi-level of planning would also require to cut the goal into little time-bound sub-goals that are easy to achieve. This will give you extra motivation: eat the elephant by piece.
Find out exactly how much you spend: consult your bank statements, receipts, and financial files. Add up everything you spent for the last 6 to 12 months and divide by the number of months, which will give you your average monthly expenses. Be thorough: a forgotten bill really throws a wrench into your savings plan. There are special mobile apps that help you record spendings on the go. A good rule of thumb is to add an extra 10 to 15 percent to that average — if you’ve determined that you spend $1,500 a month, add a rough $200. Don’t forget to add another 10 to 15 percent on impulsive buying.
Determine your income
Once you’ve figured out how much money you need to stay afloat, it’s time to determine your actual income. Besides your regular salary, add in any extra funds that come your way throughout the year — cash gifts, a sale of items, interest, dividends, rental income etc.
Subtract your monthly expenses from your income. If you’re making more money than you’re spending, congratulations. This amount can be earmarked for savings and to pay off debt. But if it’s the opposite, some cutting is in order.
Determine exactly what you can delete from your shopping cart without compromising the quality of life you’re accustomed to. Be merciless to luxury goods and cut enough to have 10 to 20 percent of your income left over each month. It’s possible to do this with almost any level of income. But if you feel that the quality of life will, in any case, fall dramatically, look for ways to increase your income. Perhaps you can monetize your hobby or invest in self-education to get a better job?
Record spending and track progress
The best way to stay on top of your budget is to record all of your expenses and income. Having to input expenses will cause you to think twice before buying impulsively, and it’s especially satisfying and motivating to record when you’ve met a savings goal.
Aim for sticking to your budget most of the time, and you’re bound to reach your financial goals. Breaking your budget occasionally is OK, providing you get right back on track as soon as possible.