The Step-by-Step Guide to Creating a Budget That Works
Meet Sarah, a mid-life professional who thought she had her financial life under control. She had a decent job, a comfortable apartment, and even a little extra cash for the occasional weekend getaway. However, behind the scenes, Sarah was anxious about her finances. She had a vague notion of her expenses, but they often exceeded her income. She had recently been promoted with an accompanying pay rise, yet that feeling of living pay check to pay check was ever present. Have you ever felt like you're on a financial treadmill, working hard but never quite sure where your money goes? That was Sarah's predicament. It's a scenario many of us can relate to. Known as lifestyle creep, it's the tendency to spend more when our income increases. This sneaky phenomenon can affect even high earners, leaving them struggling with debt, retirement savings, and other financial responsibilities.
"The negative impact of lifestyle creep might not become evident until you're well into your 40s or 50s and starting to contemplate retirement," says Gideon Drucker, a financial planner at Drucker Wealth Management.
How To Take Back Control of Your Finances
Step 1: Gather Your Financial Information
Just like Sarah, your journey to financial stability begins by collating your financial data. This includes bank statements, bills, income documentation, and debt statements. Take a close look at your financial snapshot, no matter how intimidating it may seem.
Pro Tip: Think of this step as confronting your financial reality. It may be uncomfortable, but it's a necessary starting point.
Step 2: Calculate Your Monthly Income
Calculate your monthly income. Be sure to include every source, from your salary to any side hustles or passive income. If you are expecting a pay rise, think about your goals in relation to the pay rise before it hits your account. How will you spend that extra income? Will it go towards paying off debt, or into your pension fund or will you invest it? Be intentional to ensure that your actions are in direct alignment with your financial goals.
Pro Tip: Sarah learned the hard way that overestimating income can lead to unrealistic expectations and overspending. Be conservative.
Step 3: Identify Your Monthly Expenses
Categorize your expenses into fixed and variable. Fixed expenses, like rent and debt repayment, remain constant. Variable expenses, like groceries and entertainment, fluctuate.
Pro Tip: Sarah was surprised to see how much she spent on dining out. Identifying this helped her realize where she could cut back.
Step 4: Set Financial Goals
Your financial journey needs a North Star, something to aim for and guide your way. That's where clear financial goals come in. Short-term goals are like stepping stones on a trail. These are your small wins, like paying off a credit card, saving for emergencies, or planning a fun trip.
Long-term goals are like sparkling stars in the night sky. They're the far-off dreams, such as saving for retirement, buying a house, or helping your kids with their education.
Your budget is like a map for your journey, and your financial goals are your destinations. Without these goals, your budget is like a compass with no real purpose. Goals give your budget a job. They turn it into a tool that helps you control your money and move closer to your dreams. So go ahead and empower yourself by setting clear financial goals.
Step 5: Create Your Budget
Now you are ready to create your budget. Allocate your income to cover expenses, savings, and debt repayment. Remember the adage KISS (Keep It Simple, Stupid)? This is not the time for complicated tools. There are some good, simple and free budgeting templates which will do the job just fine. Ensure your budget supports your financial goals.
Pro Tip: Allocate a portion of your income to an emergency fund. Life is unpredictable, and having a financial safety net is vital.
Step 6: Monitor and Adjust
Budgeting doesn't end with the creation of a spreadsheet. Regularly monitor your expenses to stay on track and adjust as needed.
Step 7: Reduce Unnecessary Expenses
Identify areas where you can cut back, just as Sarah did. This can free up money for more meaningful expenditures.
Step 8: Pay Off Debt
Prioritize paying off high-interest debts. Reducing your debt burden releases funds for other financial goals.
Step 9: Save and Invest
Saving is not an afterthought; it's a fundamental part of your budget. Consider automated transfers to your savings and investments to ensure you consistently allocate money for the future.
Step 10: Review and Adjust Periodically
Your budget is not set in stone. Review and adapt it regularly to accommodate changes in your life.
Budgeting isn't just a chore; it's a skill that empowers you to take charge of your financial destiny. So, start today, and you'll be well on your way to financial success.
***Disclaimer***
All opinions are mine and personal. Please do not construe any of my posts as investment advice. I do not provide any buying or selling recommendations, nor offer any investment advice. You are advised to conduct your own research and due diligence when making financial and investment decisions.