A common misconception people have about budgeting is that it’s limiting. Some believe budgeting refers to a life of self-denial. A life that hinders you from exploring opportunities and enjoying yourself. But, this is totally untrue.
Yes, one must be able to draw the line when it comes to spending. But, frankly speaking, budgeting without financial freedom makes it impossible for you to achieve all your financial goals.
It also means you don’t truly understand the basic principles of careful budgeting. And you might, over time, fail to attain the financial freedom and prosperity you want.
If you’re here seeking help on how to create a careful and sensible budget, you’ve come to the right place! Below are some basic rules of careful budgeting. But, before we go into these budgeting basics; let’s answer the question, “what is budgeting?”
What is Budgeting?
We all know, or seem to know what a budget is. But, unfortunately, only a few of us truly understand the true meaning of budgeting. This is why it’s important we get that out of the way before we get into the basic rules of careful budgeting.
Without wasting your time…
Budgeting simply is a process, and this process involves making detailed projections of how you want to spend money. It involves weighing your income against your estimated expenses over a period.
As Akhilesh Ganti of Investopedia explains, budgeting deals with how you manage your expenses, or how you keep track of your earnings and spending over time. According to Akhilesh, one does not even need a good knowledge of math to create sensible budgets. You can set attainable financial goals yourself and succeed at them. All you need is a true understanding of what the basic rules of budgeting are.
Basic Rules of Careful Budgeting: Key to Your Financial Freedom
Now, we have the true meaning of budgeting out of the way. So, what are the basic rules of careful budgeting?
How can you carefully budget money?
1. Study Your Previous Spending Attitude
“The more you know about the past, the better prepared you are for the future” – Theodore Roosevelt
A question to ask yourself before starting your budgeting journey is; “how have I been spending so far?” “Is my spending healthy, or do I need to change or upgrade some things?”
To answer these questions, you’d have to gather all the needed information.
You’d have to gather all your payment receipts for the last 3 months—even for the slightest things you’ve purchased. You’d also have to get your bank statements, utility bills, credit card bills, mortgage statements, and so on ready as well. They’d all be important in creating an average spend for your budget.
One of the reasons you should dig into your spending past is because it allows you to determine a spending estimate or average. And this requires all the info you can get on how you have been spending money so far.
This info will help you to make a reasonable projection of your future spending. Having them will also ensure you don’t fail out before you even start budgeting.
2. Determine Your Gross Income
Your gross income is your income before you settle all your bills. That is, what you earn before you save, set out the best assets to invest in, and invest in them.
For a worker with a fixed income, this can be as easy as stealing candy from a baby. But, for entrepreneurs who can’t exactly determine what they’ll make at the end of every month, it might be a bit tasking.
A good way for entrepreneurs to figure this out is by finding their average monthly turnover. Then, they can weigh this against their average monthly spend. The next stages of your budgeting process would be easy as ABC once you can achieve this.
3. Determine A Suitable Budgeting Method
To be able to create a sensible budget, you need to select the most suitable budgeting method. One that best suits you as a person and/or the type of business you do. You’ll find that these methods are similar in their objectives, but all undertake different processes to achieve the same goal.
So, you must be able to make the perfect choice before going ahead with your budgeting process.
To make the perfect choice of a budgeting method, you need to do the following:
- Carry out a self-assessment to determine your financial state and goals;
- Decide the kind of effort you’re willing to dedicate to the budgeting method’ processes;
- Consider your budgeting method options.
4. Track Your Expenses Over Time
Budgeting comes with the ability to track your spending over time. The truth is, if you want your budget to work, you’d have to regularly go through your expenses over a period (preferably monthly). This helps you to know when you’ve overspent or where you can cut down on costs.
To do this, you would need a written ledger. But the world has gone past paper and pen. Instead of the written ledger, you can make use of advanced technologies like mobile apps (trackers). These apps make it easier for you to track your budget. They also help you to better get a hang of your monthly expenditure. You can download any of them from your mobile app stores to get started.
Regularly Optimize Your Budget
Budgeting doesn’t end with creating a budget and following it alone, you also need to regularly update it as time goes.
Your budget should not be limiting or too rigid. It should, however, be a template or master plan on how to best spend money. So, it should be occasionally revised. And, revisions must be made to suit the different situations and economic climates of the time.
Create Your Budget
Now that you know the basic rules of budgeting, what’s next? Choose a budgeting method that’s best for you or your company and then create your budget.
If you can obediently follow the rules here, you will be able to better manage your funds. You get to spend less or more on things you need. And most importantly, you get to lead a life of maximum financial freedom. A life we all strongly desire.