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Create a Budget: Easy Steps To Financial Freedom

Trying to get your finances under control can feel like a daunting task, but budgeting is a great place to start. However, for many people, creating a budget just ends up in frustration. 

What many people don’t realize is that there’s no magic formula for creating a budget that works for everyone. The best way to create a budget is to start by tracking your spending for a month so you have a better idea of where your money is going. From there, you can start to make some tweaks to ensure your spending aligns with your goals and values. It may take some trial and error, but eventually, you’ll find a system that works for you. And remember, budgets are meant to be flexible – so don’t be afraid to make changes as needed.

A recent survey carried out by Intuit revealed that 65% of Americans have absolutely no idea how much money they spend in a month. What’s more worrying is that 75% of survey respondents admitted they have no clear financial goals.

What Is A Budget and Why Is It Important?

A budget is an action plan for your finances. It tells you how much money you have coming in and where it needs to go. Creating a budget helps keep your finances under control by creating guidelines for spending and saving. It can also help you track your progress over time, identify areas where you may be spending too much, and make adjustments as needed. By creating a budget, you can get a better sense of where your money is going and make changes to spending habits if necessary. At its core, a budget is a tool that can help you take control of your finances and make informed decisions about your spending and saving.

To create a budget you begin by listing all your income and expenses over a specific period – usually one month. This will give you an idea of how much money you have coming in and where it’s going out. Once you have this information, you can start to make adjustments to ensure your spending aligns with your goals. For example, if you want to save for a down payment on a house, you may need to cut back on other expenses in order to free up more money for savings. Or, if you’re trying to pay off debt, you may need to create a debt repayment plan and allocate a certain amount of money each month towards that goal. It’s true that budgeting takes some time and effort, but it can be an extremely helpful tool in achieving financial stability.

Creating a budget that works for you is one of the smartest things you can do for your finances. It can help you save money and reach financial goals, such as paying off debt or building up an emergency fund. Additionally, and very importantly, sticking to a budget can help reduce stress levels and improve your mental health and financial wellbeing.

So, if you’re tired of wondering where all your money is going and you’re looking to get your finances on track, creating a budget is a great place to start.

Ready To Begin?

Great! Let’s get started.

You need three things to start the budgeting process – your financial goals, your income, and your expenditures. Using these three things we can create the key steps to create a budget that works for you.

No. 1: Define Your Goals

It’s important to define your goals in life for a number of reasons. By creating a budget and setting financial goals, you can make better decisions about how to save and spend your money. These goals help keep you motivated and on track as you work towards your long-term objectives. Setting goals helps you measure your progress and identify areas where you need to improve. However, having a goal is one thing, creating an actionable goal is another.

Let’s begin by determining a couple of your long-term goals. These will be things you really want – things that excite you. Now that you’ve figured that out, the next step is to turn these same goals into SMART personal financial goals.

What is a SMART Goal?

A SMART goal is a goal that’s –

  • Specific, 
  • Measurable, 
  • Attainable, 
  • Time Based, and
  • Relevant, 

In other words, it’s a goal you can actually achieve, and you know exactly how you will measure your progress. For example, let’s say you want to save money so that you can go on a holiday in six months’ time. A SMART goal would be to create a budget and save $900 by the end of the six months. This goal is specific (saving $900 for a trip), measurable (you’ll track your progress by recording your spending and savings each month), attainable (it’s possible to save $900 over six months), relevant (the holiday is something you really want to do), and time-based (you have set a timeline of six months). By creating a SMART goal, you increase your chances of achieving your desired outcome.

No. 2: Work Out Your Monthly Income

The next piece of data we need is your monthly income; this means your total income for a single month. Some people are paid monthly, or twice a month; for those who are paid every other week, just assume your budget will be based on two paychecks. For those paid weekly, your budget will be based on four paychecks. If you’re lucky enough to have an additional or unexpected check come in, use that money to make an extra debt payment, cover an irregular bill, or make an additional contribution to your savings.

No. 3: Track Your Spending

Tracking your income and expenses gives you a pretty clear idea of where your money is going and whether you’re on track to meet your financial goals.

There are a few different ways to create a budget. You can use a software program like Quicken, Mint, or You Need a Budget. Or you can simply create a spreadsheet in Excel. If you prefer the old-fashioned way, you can use a pen and paper. Whichever method you choose, the important thing is to be as detailed as possible.

Include all of your sources of income, including your salary, any investments, and any other sources of money. Then, list all of your expenses, including everything from your mortgage or rent payments to your groceries and entertainment costs. Don’t forget to go through your bank card and/or credit card to review your spending, including all your saved receipts for everything you’ve paid for. It all adds up!

Once you’ve gathered all your information, it’s time to start analyzing it.

No. 4: Put Your Expenses Into Groups

We suggest waiting until you have at least two months of receipts saved up before creating a workable budget that’s right for you.

One of the most important steps in creating a budget is to group your expenses into categories. This will help you see where your money is going and identify areas where you may be able to cut back. Typically, expenses are grouped into categories such as –

  • Housing, 
  • Transportation,
  • Food, and 
  • Entertainment. 

However, there’s no hard and fast rule for how to categorize your expenses. The most important thing is to use a system that makes sense to you – one you can stick to. If you find that your current system isn’t working, don’t be afraid to experiment until you find a method that works for you.

Once you’ve divided your expenses into different categories, add them up, then divide by the number of months you chose. Let’s say you used two months of statements and receipts; you need to divide each group’s total by two. If you used three or four months, divide by that number. The more months you use, the more accurate your budget is likely to be when it comes to capturing a ‘normal’ month’s figures.

Next, list all your categories, including the ‘per month’ amount in each one. Your total monthly income should be written at the top. Now you’re ready to take the next step.

No. 5: Determine Your Cut-Back Areas

We’re now going to create a starter budget for you. Add a couple of extra lines for the goals you previously defined. Think of a small-ish amount that you’re prepared to contribute to these long-term goals, and write it down. Next, subtract the total amount of all your spending categories (this includes your goals) from your total income.

Don’t be surprised if the result is a negative number. This is the very reason we’re creating a budget! Now you know the amount of money that must be cut from your budget, in particular from categories with flexible spending.

No. 6: Create a Plan

Now we need to create a workable plan to help you meet your budget. Start by determining which categories contain items that can be cut back just a little; items that won’t negatively affect your life too much. If the cuts you make now make your life miserable, you won’t stick with the plan and you’ll never meet your goals.

The easiest way to make these decisions is to go through each item on your list, asking yourself if this expense contributes to your lasting happiness. If the answer is a resounding ‘yes’, leave that figure alone. If the answer is ‘some of it’, or ‘not really’, you’ve discovered a prime target to cut back on. At this point, we suggest giving yourself a number to shoot for over the coming month.

No. 7: Change Your Habits

This, for some people, is the difficult part, but it’s not difficult for those who are determined to resolve their spending habits. It’s time for action! This means it’s time to start adjusting your routines and habits.

The categories that need your attention now are the ones to cut back on and the new goal categories you added. 

We’ll start with the cut-back categories. Think about the expenses within that category that are relatively unimportant to you; these are the ones that don’t bring lasting happiness. Don’t touch the ones that make you happy. The questions to ask are: ‘After a month, will I still be happy with this expense?’ ‘Are there expenses from a month ago that I now consider wasteful?’ These are the expenses that you can start cutting out. Create new habits that lead you away from those expenses, such as taking lunch to work with you, or changing your commute.

When it comes to your goals, the only sure way to stick to these categories is to automate them. Our suggestion is to open a savings account at a remote back and set up small weekly transfers from your current checking account. After four weeks, your budgeted amount will have been moved into that account.

No. 8: Assess After One Month

This month will be your 30-day financial challenge. Sit down at the end of the month and see how you managed. Sort all your monthly expenses into groups, then compare your budget to your actual expenses at the end of the month. How did you go with your new habits? Was it difficult to stick to? What were the easy parts and what were the difficult parts?

Congratulations on sticking with the plan! If you found this an easy month, that’s fantastic. It means you’re on the right path, so just keep going until you reach your goals.

No. 9: Make The Required Adjustments, Then Repeat

You may need to make some adjustments if you found it difficult to stick to the plan. It could well be that you only need to tweak your budget just a little, but if you were a long way off it might be time to try a different approach. Perhaps something with more structure. Have a look at these strategies for fixing common budget problems – there may be something there to help. There’s a wide range of budgeting systems online that offer different approaches and lots of guidance to help you stay on track and committed to meeting your goals. Have a look at budgeting systems that are right for you.

No. 10: Keep Evaluating

Creating a budget isn’t a one-time thing; it’s a pattern that continues on a monthly basis until such time that it’s so deeply ingrained into your habits that you won’t need one anymore. However, until that time arises, continue evaluating, tweaking, and repeating until these new habits are so normal they feel completely natural. At that time, you’ll be so happy you took the time to create a workable budget; a budget that led to long-term financial success, and one that helped you achieve all your dreams and goals.

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