Creating and maintaining a budget might seem simple, but there’s a reason why not everyone utilizes a financial plan or successfully follows through when implementing one.
Budgets are sometimes thought of as restrictive and limiting. However, a well-planned budget can lead to financial stability and freedom for an individual or family.
DiversyFund reviews five simple steps to building a budget – take a moment to grasp these concepts and explore how they can benefit your financial life.
What is a budget?
Let’s break it down. Every strong financial plan starts with developing a budget, which is primarily
planned spending that creates a way for you to reach your financial goals. It helps prevent overspending and makes living within your means attainable. All the extra money you
save through budgeting will benefit you in the future.
How do you build an adequate budget?
Step 1) Review your monthly spending
To build a budget, first, understand how much money you regularly spend. Have a clear image of what your monthly income is, and then compile all of your
receipts, pay stubs, bills, and bank statements. Comparing the two will help you move forward to your next step.
Step 2) Identify your spending habits
Reviewing your income and purchases over a month can help you identify your spending habits and build a realistic budget.
Contemplate what purchases are needs versus wants. Prioritizing your expenses helps you identify which monthly purchases you should avoid.
Step 3) Figure out your financial health status
If you’re interested in making investments in the future, you need to know where your current
financial health stands. You can then clearly see how far you are from reaching your goals and what it’s going to take for you to get there.
You can determine financial health by subtracting your monthly spending from your monthly income. The remaining amount gives you an idea of how much cushion you have to work with. If there is no cushion available, then you might want to consider
cutting expenses. Expense experts suggest cutting enough expenses to leave no less than ten to
twenty percent of your monthly income after subtracting costs.
Step 4) Set your goals
When establishing your plan, place debt elimination at the top of your list. It’s a wise decision to allocate your monthly cash overflow towards paying off debt or starting a savings account for a more financially stable future. Individuals with little to
no debt can choose to split extra income between investments and savings.
Step 5) Maintain your budget
Once you’ve figured out what your monthly budget looks like, the process doesn’t stop there.
According to DiversyFund, committing to a budget is a lifestyle change. Most people continuously have to remind themselves of their goals
and make positive adjustments daily. Maintaining a budget requires a similar mindset.
Check in with yourself regularly about how you are aligning with your budget. Keeping up with good habits will help you establish a stable financial future.