Budgeting Basics: Creating a Roadmap for Success
Budgeting Basics: Creating a Roadmap for Success
It all starts with the budget. To get where you want to go, you need a map; without a map you end up lost and somewhere you don’t want to be. Here are the budgeting basics and creating a roadmap for financial success.
Understanding the Importance of Budgeting
A budget plays an extremely important and vital role in financial planning.
A budget is simply a spending plan that considers estimated current and future income and expenses for a specified future time period, usually a year. Having a budget keeps your spending in check and makes sure that your savings are prioritized and on track for the future.
The benefits of budgeting in reducing debt, increasing savings, and achieving financial freedom.
A budget can often help build financial independence and freedom. A budget can also set you on the right path to achieving your financial goals, spending within your means, saving for retirement, building an emergency fund, and analyzing your spending habits.
Assessing Your Financial Situation
Everyone should start with a review of their current financial situation, including income, expenses, debts, and savings.
A financial plan review is a process of evaluating your existing financial plan to determine whether it still aligns with your financial goals and objectives.
This review typically includes an analysis of your income, expenses, assets, liabilities, and investments to identify any gaps, inefficiencies, or areas that require adjustment.
The purpose of a review is to ensure that your plan remains relevant and effective in helping you achieve your financial goals over time. Financial plan reviews are essential because they provide an opportunity to assess your progress and make necessary changes to your plan.
The significance of tracking spending and identifying areas where money can be saved.
Tracking Monthly Expenses: The First Step to Money Success. When you start tracking expenses, you can separate your spending into three categories: needs, wants and savings. Tracking your spending on a regular basis can give you an accurate picture of where your money is going — and where you’d like it to go instead.
Setting SMART Financial Goals
The concept of SMART goals (Specific, Measurable, Achievable, Relevant, Time-bound) are important in how they relate to budgeting.
Setting Financial Goals is just about Identifying what you’d like to accomplish financially and creating a plan to make it happen.
We suggest setting SMART goals. SMART goals help you identify exactly what you want and how you plan to achieve it. SMART goals are Specific, Measurable, Achievable, Relevant, and Time-Based.
Specific: What do you want to accomplish?
Measurable: How will you know that you’ve achieved your goal?
Achievable: Is your goal realistic?
Relevant: Is your goal aligned with your personal identity and needs?
Time-based: By when do you hope to achieve your goal?
When setting goals, you must consider goals for both the short term and the long term. A short-term goal is something you wish to accomplish in the near future.
How long are short-term goals? They’re short-term needs that you can achieve today, this week, this month, or even this year. For example, you can set a career goal like getting rid of a debt or a short-term savings goal like setting aside money for an emergency fund.
Short-term goals can also be steppingstones or actionable steps to reach a long-term goal much further down the road.
A long-term goal is something you wish to complete in the distant future and takes more time, planning, and patience. You can’t do them in a few weeks and dust off your hands; you might need ten years.
领英推荐
Usually, these goals consist of several mini-goals or steps, which is why it’s important to determine short-term goals alongside your long-term plan.
You can say that long-term goals are normally used to support your short-term goals.
For example, your long-term goal can be to set up your own business, a savings goal for your retirement account, etc.
Creating Your Budget
There are different budgeting methods: zero-based budgeting, 50/30/20 rule, Incremental budgeting, Activity-based budgeting, Value proposition budgeting and flexible budget). You should know what they are and then choose the one that aligns best with their lifestyle and income level.
Zero-based budgeting?is when your income minus your expenses equals zero. Perfect name, right? So, if you make $3,000 a month, everything you give, save, or spend should add up to $3,000. Every dollar that comes in has a purpose, a job, a goal.
The 50-30-20 rule?recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Incremental budgeting?is the traditional budgeting method whereby the budget is prepared by taking the current period’s budget or actual performance as a base, with incremental amounts then being added for the new budget period.
Activity-based budgeting?is a method of budgeting where activities that incur costs are recorded, analyzed, and researched. Activity-based budgeting can allow you to record, track and reduce expenses to improve efficiency. Adopting an activity-based approach may give you greater control over your budget and promote better resource management.
Value proposition budgeting, also called priority-based budgeting, is all about analyzing and justifying the value of every single item on an expenditure list. Ultimately, it is an attempt to find out where a someone should spend money when aiming for the best result or bank for the buck.
Flexible, rolling budgets?empower people to cope with change. This nimble planning process lets you adjust spending throughout the year; benefits include less overspending, more opportunities and speedier responses to changing macro or micro economic conditions.
Here is a step-by-step process for creating a budget, including income allocation and expense categorization.
Tips for Sticking to Your Budget
You must stay disciplined and committed to the budgeting process. Here are some tips for sticking with it.
Your budget is going to vary from time to time and you need a strategy for overcoming common budgeting challenges and handling unexpected expenses.
How do you overcome budget challenges? The key to overcoming the challenges of budgeting is having an emergency fund and having financial goals in place.
An emergency fund will keep you from falling off course or going into debt when unexpected things come up in the budget.
Besides the emergency fund, if you don’t have a clear goal in mind, it can cause you to lose focus on why you created a budget in the first place. Financial goals can motivate you to stick with your budget and become financially successful.
Budgeting for Different Income Levels
Different incomes have specific challenges and opportunities faced by individuals with varying income levels (e.g., low income, middle income, high income)
No matter what income or income brackets you may fall in, each have a different position and different problems so you need to be aware of where your income falls and the associated problems, roadblocks or pitfalls others in a similar income range find, encounter, or run into so you can pre-emptively overcome and not derail your overall plans and goals.
Regardless of how much anyone makes, we all need to follow a similar blueprint of living within our means, eliminating debt, finding ways to save and then invest to become financially independent.
Having a roadmap to a desired end financial outcome is key to getting what you want from your money. The first and crucial step to creating that roadmap is the budget.
This article covers the budgeting basics:?Understanding the Importance of Budgeting,?Assessing Your Financial Situation,?Setting SMART Financial Goals,?Creating Your Budget,?Learning to stick to Your Budget and?Budgeting for Your Income Level.
Don’t wait or delay…take action now and start budgeting to achieve your financial goals.