Budgeting - Most of you are familiar with the name. But, the question is, how many of you religiously follow it? However, it is a basic requirement to manage your finances efficiently.
Steps to plan a realistic budget
Here are 4 simple steps to plan a realistic budget:
1 Calculate your total income
Open an Excel sheet or sit down with a pen and a paper, and calculate how much you earn every month. Make sure you take into account your income from all sources.
2 Estimate your overall expenses
Now, it's the time to categorize your expenses. First of all, take into account your fixed expenses (such as, your mortgage and other loan payments) and then your variable expenses (such as, entertainment, shopping, grocery, etc.). To calculate your variable expenses, take an average of the amount you've spent in last few months in that category.
3 Calculate your savings
Now, calculate your overall expenditure and check out how much you'll be able to save every month if you follow this plan. If you're happy with the result, start following this budget.
4 Repeat the process if required
If you are not happy with the amount you're saving, or your expenses are more than your savings, you need to revisit your budget and cut down expenses from your expenses categories' in order to save more.
These are the steps to plan a monthly budget. You can follow the same steps to plan an annual budget, too. But, if you're planning budget for the first time, at first plan a suitable realistic budget. Once you're successful in doing that, that is, you're able to follow your budget and save the required amount, you start planning a quarterly or annual budget to plan your financial goals.
Another important thing - It is necessary to revisit your budget from time to time in order to make modifications, if necessary.
4 Types of budgeting strategies
Here are 4 popular budgeting techniques:
1 Simple budgeting strategy
This is the one which has already been discussed. That is, you allocate a definite amount for each of the items you need to spend money on. And, at the end of the month, analyze whether or not you've been able to save the required amount.
2 Envelope budgeting
This is one of the best strategies to keep track of your money. Just like classic budgeting, you allocate a certain amount against each of the items you spend money. Then, keep the allocated amount in separate envelopes with specific labels, such as, grocery, utility bills, entertainment, variable expenses, etc. Most importantly, you should pay everything in cash; you take out the required amount from the specific envelope and keep the change in that envelope itself. This will help you know how much amount you have in each category. It will help you control your expenses, since it's easier for you to know what's the remaining amount in that category. In this budgeting, you're allowed to move cash from one envelope to another but you cannot withdraw any amount from your bank. With this budgeting technique, you'll gradually become conscious about your spending and can plan it in a better way.
3 Zero-based budgeting
As the name implies, the main idea of this budgeting technique is that your monthly income minus your monthly expenses should be zero. Even if you have saved, say $200, at the end of the month, you're not successful as per this budgeting technique; you need to decide where the amount should go. What you can do is use this extra amount to repay your existing debt or save more in your emergency fund. Studies reveal that people who use zero-budgeting can actually save about 18% more money and they can pay off about 19% more debt as compared to others practicing other budgeting techniques.
4 Priority-based budgeting
This is also an useful budgeting technique wherein at first you use your monthly income to satisfy your top priority items, such as, mortgage payment, student loan payment, retirement account, debt payments, etc. Then, you spend the remaining amount on other items till you're out of cash. However, the rule for this budgeting technique is that you cannot withdraw any more from your bank account; therefore, you need to keep a track of your spending so that you're not out of cash till the end of the month.