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Budgeting is one of the key habits of people who are financially successful. Creating a simple, household budget is easy to do and can change your entire outlook on your personal finances.
To start, let’s cover a few budgeting basics.
Table of Contents
What is a Budget?
A budget is a financial plan that, in its most basic form, takes into account your income and expenses. By creating a budget, you are estimating how much income you plan to receive over a given period of time and what you intend to spend it on.
What is a Balanced Budget or Zero-Based Budget?
A balanced budget or zero-based budget is a budget that has the income and expenses equal to each other. When we talk about creating a simple, household budget later, we will be talking about this type of budget.
In the context of personal finances, this essentially means you have full control over your income. You tell it where to go each month and don’t exceed your income by having more expenses than income.
Why Create a Personal Budget?
What are your financial goals? Would you like to start your own blog and work from home? Would you like to be financially free and not need to work? Would you like to retire early?
For most of us, we need a financial plan to achieve our goals. If we don’t create a budget, month after month our money will disappear to expenses that we don’t truly want or need.
The sooner you can take back control of your personal finances, the sooner you can be intentional with your money in pursuit of your financial goals and dreams.
Related: 11 Reasons Why You Need a Budget
How to Create a Simple Monthly Household Budget
Creating a simple monthly household budget is easy. In its most basic form, you:
- Track and record your gross income and expenses for the month (this tells you where your money is currently going)
- Write down your financial goals; both short term and long term.
- From these goals determine what expenses are important to you. Cut the expenses that aren’t.
- Tell each dollar where to go including how much to savings and retirement.
By creating a budget that balances each month, you are completely in control of your finances
For a more detailed explanation, please visit: How to Create a Simple Monthly Household Budget
Related: How to Budget With an Irregular Income
50-30-20 Budget Rule
This budget is a simple template for sound budgeting; especially when first starting off. It suggests budgeting 50% for needs, 30% for wants, and 20% for savings.
I don’t strictly adhere to this rule personally, but I use it as a check on my budget. I always want to be more conservative than this rule (i.e. spend less than 50% on needs and less than 30% on wants with more than 20% going towards savings and retirement)
For a more detailed explanation, please visit: What is the 50-30-20 Budgeting Rule?
Why You Need an Emergency Fund
An emergency fund is money that you’ve saved for those times when unforeseen financial emergencies come up. No one can consistently predict the future, so why try with your personal finances?
If you experience a financial emergency and are unprepared, one bad financial surprise like a job loss or medical emergency could wreck your finances. In the case of a job loss, could you live 3-6 months without your income?
For a more detailed explanation, please visit: Emergency Fund Guide: What, Why & How Much Money to Save
Budgeting is a Habit, Keep at it and Reward Yourself
For some people, myself included, budgeting can be a chore to perform each month. To keep from giving up, make sure your financial goals and important milestones are front and center each day, week, month. These goals will give you the energy to create your budget each month and follow it.
As you meet your milestones (i.e. pay off a loan, anniversary of starting budgeting, meet an investing goal), you should celebrate. This will help keep you motivated to continue and make you feel good about the work you’ve done up to this point. This isn’t permission to wreck your finances, but it should be a treat that you don’t usually allow yourself.
Related: 9 Best Personal Finance Habits to Start Now
Budgeting 101 – Budgeting Basics – Conclusion
Budgeting can be as simple or as complex as you make it. I err on the side of simple as the less time it takes and easier it is to complete, the more likely you’ll stick with it.
The most important part of budgeting is getting started and not giving up. The longer you wait to get started, the longer it will take to achieve your goals.
What is your motivation for budgeting? What do you use for your monthly, household budget (i.e. application, excel, notebook, etc.)?