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Steps to Building a Successful Budget

 

Formal budgeting is often seen as a cumbersome exercise, yielding more tedium than tangible financial gains. Record keeping aside, the process does furnish valuable insight for those committed to tracking expenses and accounting for household cost of living. The key to maximizing the positive impact of formal budgeting is applying discipline and using the data to take control of your financial life.

In its simplest form, a budget is balance sheet, accounting for income and expenses. And while there are many ways to manage household finances, budgets formalize the process, putting your bad spending habits under a spotlight. Identifying where your money goes enables you to divert resources to more important areas, as you realign spending priorities. Especially when financial difficulties cause cash flow problems, budgeting helps ensure your income stretches to cover all of your expenses.

If you’ve had limited success with prior attempts, or are creating your first formal budget, stick to these basic budgeting tactics.

Categorize – Your household financial flow operates like a small economy, addressing spending in several distinct areas. In order to create a realistic record of your spending, break it into smaller pieces, to track as related purchases. Your “Entertainment” category, for instance, includes spending on movies, concerts and music downloads, as well as cable TV subscriptions and nights out with friends. Another classification, called “Food and Dining”, captures spending at the grocery store and money paid for prepared meals. If your gastronomic explorations are more like entertainment than sustenance, you may choose to file restaurant costs in that category. The key is remaining consistent, so categories reflect the same type of spending each month. Additional categories to consider as you track spending:

Travel/Transportation

Automotive

Household/Utilities

Clothing

School

Medical Costs

Your Own Unique Classifications…

Track Spending and Income – Effective budgeting balances income with outgoing spending. In order to build a meaningful budget foundation, it is important to closely track spending for an extended period of time. For the best results, note purchases in a ledger each month, for at least three consecutive billing cycles. Once each month is complete, budget columns can be reconciled, so you know exactly how much money was spent in each category. Over time, subsequent months can be used to identify and compare spending trends.

Accounting for income is fairly straightforward when it comes from a single source, but you should also include money made on the side. Investment returns, hobby businesses, and even gambling winnings should all be included in your plus column, before you begin to tally expenses.

Set Spending Limits – Once you’ve accumulated personal financial data, it is up to you to put it to good use. Using your established categories, turn your eye toward budget savings, setting spending limits in each category. Discretionary purchases yield the most potential for trimming, because ‘fixed’ monthly expenses do not change substantially from month to month. Be realistic, but also challenge yourself with budget limits forcing you to spend sensibly.

Make Adjustments – Even with several months’ worth of spending records at your disposal, it can be difficult to craft a manageable budget. Start with core costs, addressing big-ticket obligations like mortgage repayment, car notes and other fixed monthly costs. As you rein-in your discretionary budget, leave room for adjustments. A cancelled subscription, for example, can always be reinstated, should your budget yield resources to cover the cost. Likewise, ineffective budgets can be tightened further, when cost-cutting measures don’t add-up to sufficient savings.

Show Resolve – Budgeting is a directed effort, so commitment and resolve are key ingredients for success. If budgeting is uncomfortable, you are probably doing your job, leaving no spending unexamined. To assist those put-off by the process itself, budgeting apps and software simplify record keeping and furnish intuitive tools for managing cash flow. Use these and other resources to remain steadfast throughout the initial formal budgeting process. Once established, your budget becomes increasingly easy to maintain, as good habits replace poor spending outcomes.

Without an accurate understanding of where your income is spent, it is difficult to take control of your personal finances. Formal budgeting highlights cash flow trends, illustrating where your money goes. Armed with a ledger tracking expenses and a commitment to maximize resources, it is possible to carve out savings and stretch your financial reserves. Use these 5 steps to jump-start your personal budgeting resolve.

 

By: TDS Capital    Category: Personal Finance

August 5, 2016, 3:20 pm