You’ve probably heard it a thousand times: drawing up a budget for your finances is important. But if you’ve never done one and don’t know where to start, it can feel pretty daunting – even more so if you don’t want to look at your financial situation too closely. You may have debt you’re ignoring, or you know you’re spending too much on a store card that you don’t really need. While starting a budget will force you to confront these issues, it’s also your first step to financial freedom, and that’s pretty exciting. Here’s how to get started.
- Goals
Before you begin, write down your financial goals over the next three, six and 12 months. Maybe you want to pay off your store cards within three months, open a savings account within six, and have enough money to go on holiday within a year.
- Income
Write down all of the income that you receive every month. Don’t include things like overtime or commission, since this money can’t always be guaranteed.
- Expenses
This is important: list all of the expenses you have every month. These include your fixed expenses, such as rent and insurance, and your flexible expenses, such as food, clothing, transport and entertainment. To get an idea of your flexible expenses, take a look at your bank statements over the past few months – they’ll help you to estimate how much you usually spend on these items. They might also make you realise that you’re spending far too much money buying books when you could be going to the library, for example. Use these insights as opportunities to change your spending habits gradually over time. (Be realistic though, and don’t cut all the fun out of your life at once.)
- Avoid debt and learn to save
Add up your expenses and make sure that they are equal to or, ideally, less than your income. If they’re not, you either need to reduce your expenses or increase your income (such as taking on another job) so that you don’t push yourself into debt. If you find you have a little bit of money over each month, put it away in a separate bank account. When it comes to saving, every little bit helps.
- Check back
After a while, assess how you’re doing. Have you managed to stick to your monthly allowance for restaurants and movies? Did you remember to factor in new tyres for your car from time to time? If not, make some changes that are more realistic to your financial situation. Then revisit your budget regularly, and try to stick to it as closely as possible.
Putting a budget together can take time and effort the first time you do it, but it’s also a very empowering exercise. Once you get the hang of it, not only will it become second nature, but you’ll find you’re living more comfortably, too. And as the months tick by, maybe your dream holiday won’t seem quite so far away.
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