Budgeting your money is a great habit to get into to stay financially healthy and stay out of debt. The goal of budgeting is to know exactly where your money is going and make sure that you are not overspending. Here are some top tips on how to create a budget and stick to it.
Follow a Budgeting Framework
If you are budgeting for the first time, it might be useful to follow a framework. One framework widely recommended by financial experts as well as those who are experts in saving money, is the 50/30/20 rule which states that 50% of your monthly income should go on essential items including groceries, rent / mortgage payments, transport, utilities and childcare.
The other 30% and 20% should go towards non-essential spending and savings and debt, respectively. Non-essential items are understood as things such as travel, entertainment and dining out.
The ratios are flexible depending on what you typically spend your money on so you can choose whatever seems reasonable. Remember, the idea is to save money so be ruthless when deciding where you could make cutbacks. For example, if you are saving up for a big expense such as down payment on a mortgage, you might want to devote more than 20% to savings.
Know Where Your Money Is Going
Being aware about what you are spending and where your money is going is the first step to knowing where you might be able to save money and the basis for creating a realistic budget. This is key to knowing how to budget and borrow money responsibly and reduce your chances of falling into debt.
Experts suggest assessing at least 3 months of bank statements to analyse what your spending habits look like: both what you are spending and what you are spending on. Have a look at household income, any monthly debt such as loan payments or credit card payments, and then your expenses – everything from basic utilities to how much you are spending on dining out and holidays. You might be surprised how much certain things add up!
Keep Track Of Your Budget
When you have a budget for your money, it becomes far easier to keep track of your finances. There are many different apps and tools available to help you create a clear budget and track your spending. Many of them offer the option of categorising your expenses – this makes it easier to see which categories are responsible for the majority of your spending and where the majority of your monthly income is disappearing to.
Automating your savings can make budgeting second nature and is a great financial habit to get into. When you automate savings, you choose an amount of money that you want to go into a savings pot or designated savings account each month. This means that on a given date, a proportion of your income can go directly out of your account and into your savings before you have the opportunity to spend it on something else.
Assess Your Essential Spending
When budgeting, you could assume that non-essential expenses are the area where it is easiest to cut back on spending; for example, eating out less, forgoing that biweekly manicure or opting for a staycation rather than a foreign holiday. These are all things people do when saving for their first home and needing to show responsible money practices.
Cutting back on luxury expenses is definitely a way to save money if you are looking to manage your finances better. However, that said, you might be able to save a lot on your essential spending.
Analysing your essential spending including how much money you are spending and what you are spending money on could be a catalyst for seeking cheaper providers. For example, you might find that your monthly utility bills are the main outgoing payment which could encourage you to shop around and compare different deals.