In this article we discuss the budget planning process, getting organized, planning ahead, and saving money incrementally to avoid racking up debt on a credit card.
Here are some tips for how making a simple budget and getting organized can help you save for a rainy day (or investing) and avoid using the credit card to pay for things. In addition, we show you how to save incrementally today so that you can pay cash for things in the future.
Understanding The budget planning process Can Help You Develop Good Habits, Learn to Save and Become Organized
The primary reason you should the budget planning process is to create good money habits. Budgeting is one of the critical steps that can help you take control of your life and get ahead. In the process of taking control, we also prepare ourselves for better quality of life by having more money. Having more money means that you have more power to dictate the kind of life you want.
What The budget planning process Can Help You:
- Improve your credit score
- Save for emergencies
- Save and invest for retirement
- Stop wasting money and curb bad habits
- Promote a healthy, meaningful lifestyle
- Buy a new home or upgrade your existing home
- Obtain financial freedom
How to Create a Budget: Step by Step
Determine Your Income, Expenses and Calculate Disposable Income
Having a balanced budget means spending less of your paycheck. Preferably, you will have a significant amount of money left over to pay off debt and save for investing. In short, everyone should budget, whether you are a large corporation or just one person.
The budget planning process that we will be describing include how to create a monthly budget. Many people pay bills once per month and may get paid once or twice per month. In a simple example budget, you can create a column for expenses and a column for income. At the bottom of the page, you can total each column and the difference in the totals is either how much money you have left over or how much money you are short at the end of each month.
Step 1: Determine Your Income
Figuring out what your income is for the month is usually pretty simple. If you get paid every two weeks, then your income is the amount that gets deposited into your bank account. This is the amount that is left over after taxes are taken out. Make sure to account for each time you get paid in the month. If you don’t know what you get paid, you can look at your W-2 Tax form.
Step 2: Determine Your Expenses
Determining what your expenses are will take more time. There are several ways to determine how much you are spending each month. One way is to keep receipts and use bank statements to figure out what was spent each month. The second way to determine what you spend is to begin writing down each expense as it comes along during the month.
Fixed and Variable Expenses
As you begin tracking your expenses and determining how you spend, you will see that there are two types of expenses: fixed and variable. Fixed expenses are those that the amount paid never changes. For example, a mortgage or a car loan payment will always stay the same value, which makes planning ahead easy
On the other hand, variable expenses may vary each month. For example, your electric bill or the amount you spend dining out varies from week to week. With variable expenses, it is recommended that you calculate an average over several months and use the average for your budget.
Wants and Needs
Another budgeting consideration is wants versus needs. While learning the budget planning process, try to categorize your expenses into two groups: wants and needs. For example, a need is something like electricity or groceries. These are the things that you need to live.
In contrast, wants are the things that you pay for that may not be necessary. For example, wants can be things such as eating at restaurants, spa memberships and vacations. Moreover, you will look closer at your group of wants later when we make cuts to the budget.
Step 3: Put all the Budget Pieces Together
Now that we know what our expenses and our income are, we can add up everything to determine if we are over or under budget. The goal of having a balanced budget and learning the budget planning process is so our expense column will be less than our income. For example, if your income is $2,000 per month and your expenses are $1,500 per month, then you have $500 leftover each month ($2,000-$1,500 = $500).
The $500 that remains each month is your disposable income. Typically, you want to have a plan for what happens to the disposable income; otherwise, extra money has a way of getting spent. Moreover, it is recommended that you save and/or invest this money. However, we will touch on that later.
Sample budget provided by Piggy Bank Coins
Cut Expenses and Control Spending
Budget Not Balanced? Remove Expenses (Wants) from Your Budget: Memberships, Subscriptions, Etc.
If you are having trouble finding extra money in your budget, it may be time to cut expenses that are considered “wants.” No matter what kind of budget you have, its vitally important that you cut expenses. First, start by finding areas in your life where you can make cuts. It is helpful to make a list of what expenses are wants and needs. For example, paying for electricity is required; having a spa membership is not.
Ideas for Budget Items to Cut:
- Memberships (Spa, Gym, Entertainment, etc.)
- Subscriptions (Magazines, news, etc.)
- Dining Out/Restaurants
- Cable Bill
- New credit card spending
Learn to Live Below Your Means
Reduce Bad Habits like Eating Out, New cars and Designer Clothing
It’s critical that you form good money habits using the budget planning process. In many cases, frugal living is the cornerstone of financial success. This simply means spending less than you make. A simple monthly budget can assist you in determining whether you are meeting your goal. And these good habits can carry forward for a lifetime.
Unfortunately, living frugally is not popular in the 21st century. Popular culture dictates what “normal” consumer behavior looks like. And it’s considered normal to go out and spend money at restaurants, on vacation, etc. In addition, it’s “normal” to buy a big house and drive a new car. Having a full understanding of the budget planning process will help you create a successful budget.
Financially successful people don’t ascribe to normal behaviors. Those who attain financial success only purchase what is needed. They don’t buy new cars or fancy things. As a result, the extra money saved from this frugal behavior is put to work in investments.
Beware of Credit Cards and Debt
Credit Cards Can Create Painful Financial Lessons for You by Overspending and Interest
One dangerous lesson to learn is overspending on credit cards. In the modern era, gaining access to credit is far too easy.
Having a credit card can be a double-edged sword for anyone. First, using a credit card can be a learning tool about how debt works. In addition, you can learn about paying bills each month. However, there’s a risk that comes with credit: overspending. When you spend more money than is allowed on the credit card, or spend more than can be paid back, it can be a painful lesson in finance. However, sometimes difficult lessons can be valuable and last a lifetime.
If you make a mistake with a credit card, or overdraft an account, it can become a learning tool. Use the situation as an opportunity to learn from the mistake and implement better budgeting habits. Everyone learns the lesson of debt and compounding interest when we have to pay back what was borrowed, plus interest.
Maintenance: Review Weekly/Monthly
Review the Budget Weekly to Assess Goals and Make Adjustments
It’s important to review your budget on a weekly basis to determine if you are meeting your goals. Are you sticking to the spending requirements that you set in your budget planner book?
Revisiting your budget on a weekly basis will allow you to determine if the budget is working. In addition, you will be able to adjust it where needed.
You don’t want to cheat on your budget, but at times you’ll need to update expenses. In addition, you are compiling information over a monthly time period. As you gather this information, you will learn more about your own habits and how you can improve your personal budget.
For example, perhaps you spend less on fuel every week then expected, but you forgot to include the toll fees on your way to work each day. You will make adjustments to your budget accordingly.
Set Goals: Learn to Save Money Every Paycheck
Put Aside 10-15% of Your Regular Income for Investment
One of the habits that are important related to money management for you is learning to save some of each paycheck or from their allowance. Make it a personal goal to save 10-15% your paycheck each month. After a short time, you will realize that you don’t even miss the money.
Make saving 10-15% of each paycheck easy by setting up an automatic money transfer to their savings account. For example, each time their paycheck is deposited into the checking account, have an automatic transfer set up that moves money into the savings account. Some people find it helpful to have a savings account that is in a different bank. This reduces the temptation to spend savings.
Saving a small portion of your regular earnings is far from a new concept. Financially successful people have been doing it for hundreds or thousands of years. Saving can be a great tool when it comes to money management for you. Read The Richest Man in Babylon to learn more.
Always Keep an Emergency Fund
Unfortunately, emergencies happen to all of us. Having money for an emergency is critical. Many investment and debt consultants recommend that you start with $1,000.
Emergencies can come in many forms. Examples of emergencies you should be prepared for include medical issues, home repairs, car repairs, natural disasters, etc.
Saving for emergencies should probably be one of the first things that you do, even before saving for retirement. Make it a priority in your budget and you will rest better at night knowing you have prepared for the future.
Develop Good Habits and Learn Investing
Good Habits Include Budget Control, Staying the Course, Investment Knowledge and Discipline
Developing good money habits is critical on the path to acquiring wealth. Once you establish goals and a budget plan, you must implement good habits. Good habits include:
- Budget Control
- Staying the Course
- Investment Knowledge
- Strong Habits and Discipline
Budget control means that you operate under a balanced budget. Spending is controlled so that disposable income is saved or invested. Learning to invest now can make life easier for young people as they move into middle age.
Staying the course requires that you consistently repeat what you are doing, so long as you are successful. If something doesn’t work, it can be changed. But, the power of earning from compounding interest is continuously investing money.
Take Control Today – Start Budgeting!
If you have read this far, then you are clearly here for a reason. You are determined to make a change in your life and your behavior. A budget can be a great tool to assist you in being successful in life. Every day that you procrastinate to start a budget is just delaying your future success.
Wrap Up: The Budget Planning Process
As you can see, learning the budget planning process is not that complicated. Learning to budget simply requires developing a plan and sticking to the plan. You must also be organized and committed to the plan. Ultimately, learning the budget planning process is a clear, simple way to be successful with money.
It is important to note that Piggy Bank Coins does not provide financial advice. We do not endorse or recommend any financial investments. Instead, we provide information for educational purposes to those seeking knowledge regarding personal finance. However, in the spirit of transparency, note that the author is an investor in cryptocurrencies, precious metals and some equities.
In addition, The Federal Trade Commission (FTC) requires that Piggy Bank Coins disclose to readers that we may receive commissions when you click our links and make purchases. However, this does not impact our reviews and comparisons. Moreover, we try our best to keep things fair and balanced, to help you make the best choice for you.