How To Set Up A Budget Plan – A Step-By-Step Guide To Budgeting
Managing your finances is of utmost importance given the current economic climate. With so many things to keep track of, it’s easy to lose track of your spending and get into debt. Knowing how to set up a budget plan will help to avoid running into financial trouble. It will also help you to get out of trouble in the shortest way possible.
A budget helps you keep track of your expenses, savings, and debts and helps you achieve your financial goals.
As an accountant with over 30 years of experience helping clients get their financial houses in order, I know how difficult and insurmountable a debt problem can appear.
However, with a few decisive moves, you can tame the debt monster just like my clients have been doing for more than three decades.
Step 1 – How to Set up a Budget Plan by Setting Goals
The first step in budgeting is to set financial goals. This could include paying off debt, saving for a vacation, or a down payment on a house.
Once you have set your goals, determine the amount of money you need to reach them and the time frame.
It is important to have short-term as well as long-term goals. Short-term goals can help you keep track of your progress and give you a sense of accomplishment, while long-term goals help you plan for the future.
Assess Your Income and Expenses
To set realistic goals, you need to know how much money is coming in and going out.
Start by listing all your sources of income, including salary, bonuses, and investment income. Next, list all your expenses, including rent, groceries, utilities, transportation, insurance, and entertainment.
You can use budgeting apps or spreadsheets to track your expenses. Deduct your expenses from your income to determine your net income.
Here’s a simple family budget spreadsheet that you can download and use.
Prioritize Your Goals
Once you have determined your net income, prioritize your goals based on importance and urgency.
If you have high-interest debt, prioritize paying it off before other goals. I also advise my client to create an emergency fund to cater for unexpected expenses. Save up at least 3 months’ expenses and put it in a High-Yield Investment Account. A savings account with three months’ expenses is not much of an emergency fund, so I recommend adding to it until you have six to 12 months saved.
The emergency fund is used to cover any unexpected expenses and helps you avoid going into debt for some unexpected expenses. That is a sure way to derail your budget and set you back from paying off your debt.
Step 2 – How to Prepare a Budget by Creating a Budget
After setting your goals, the next step is to create a budget that aligns with your goals. A budget is a plan that helps you allocate your money toward your goals and expenses.
If you have a family, a budget must have buy-in from all members involved – even your children. If everyone knows what the goal is, then it becomes a team effort. Otherwise, you’ll be fighting an uphill battle to keep your expenses under control.
Creating a budget involves the following two steps:
Categorize Your Expenses
Categorizing your expenses helps you to identify areas where you can cut back and save money on your monthly expenses.
Sort your expenses into fixed and variable expenses.
- Fixed expenses are recurring expenses that do not change, such as rent or mortgage payments.
- Variable expenses are expenses that fluctuate, such as groceries and entertainment.
Determine Your Spending Limits
After categorizing your expenses, determine how much money you can spend in each category. Set realistic limits that align with your financial goals.
For instance, if your goal is to pay off a credit card debt of $5,000 in six months, set aside $833.33 each month towards debt payment.
Prioritize paying off the highest-interest debts first. Pay the minimum on all the other debt and pay everything that you can scrape together, into the high-interest debt.
When it is paid off, add its monthly repayment to the next highest-interest debt.
This way, you keep paying the same total amount of money off each month, but you allocate it in the most effective debt-reduction way.
Here’s an Example of How to Arrange a Budget Plan:
Let’s say you have a credit card that is charging you 20% interest. If your repayments come to $250 per month, then make sure you pay the $250 plus any other money you can into that debt. All the other debts receive the absolute minimum payment.
Let’s say that after 6 months you’ve paid off the credit card. Take the $250 and add it to the payment on your next most expensive debt, let’s say it’s a store card charging you 12%. Now you pay off the store card with the $250 from the credit card plus the minimum payment you were making before.
After another 3 months, your store card is paid off. Now take the $250 plus the store card payment and put them into the next most expensive debt, possibly your car repayment.
It goes without saying that you should not then use the credit card or the store card again. Lock them in a safe or cut them up if you can. Try to pay cash for everything you’re buying.
Very soon, you’ll find that you only have your house to pay off and within a few years you could be debt-free.
Step 3 – Track Your Progress
Tracking your budget helps you to ensure that you’re sticking to your spending limits and making progress toward your financial goals.
“What gets measured gets improved” – Peter Drucker
To paraphrase Peter Drucker, “If you can’t measure it, you can’t manage it.”
Monitor your spending to ensure that you’re not overspending in any category. Review your budget regularly to see if you need to adjust your spending limits. This way, you can mange your debt and adjust your budget as needed.
Budgeting apps can help you to track your spending and progress towards your financial goals.
Apps like Mint and PocketGuard can sync with your bank accounts and credit cards, categorize your expenses, and provide insights into your spending habits.
Monitor Your Spending
Monitor your spending to ensure that you’re not overspending in any category. Review your budget regularly to see if you need to adjust your spending limits.
Use Budgeting Apps
Budgeting apps can help you to track your spending and progress towards your financial goals.
Creating a budget can help you take control of your finances and achieve financial stability. The three-step process involves setting financial goals, creating a budget that aligns with your goals, and tracking your progress. It’s essential to be realistic about your goals and budget limits and review your budget regularly to adjust as necessary.
If you can’t meet your expenses with your current job, then you may need to take a second job to make up the shortfall until such time as you have paid off your debts. Consider finding a job in the service sector or even take a job at McDonald’s, as fast food never goes out of fashion.
Additional Resources Showing You How to Set Up a Budget Plan
Budgeting is a complex topic that can take a lot of effort to master. Fortunately, there are many resources available that can help you on your journey to financial stability.
Here are some additional resources that you may find helpful:
- Budgeting apps – There are many budgeting apps available that can help you track your spending, set financial goals, and even save money. Some popular apps include Mint, PocketGuard, YNAB, and Personal Capital.
- Financial blogs – There are many financial bloggers who offer great advice on budgeting and personal finance. Some popular blogs include The Simple Dollar, Frugalwoods, Mr. Money Mustache, and Budgets Are Sexy.
- Budgeting books – If you prefer to learn by reading, there are many great budgeting books available. Some popular titles include The Total Money Makeover by Dave Ramsey, Your Money or Your Life by Vicki Robin and Joe Dominguez, and The Automatic Millionaire by David Bach.
- Personal finance podcasts – There are also many personal finance podcasts that cover budgeting and other financial topics. Some popular options include The Dave Ramsey Show, So Money with Farnoosh Torabi, and The Clark Howard Show.
- Financial advisors – If you’re struggling with your finances and need professional help, consider working with a financial advisor. They can help you create a personalized budget, make investment decisions, and plan for your financial future.
- No matter what resources you choose to use, remember that budgeting is a journey. It takes time, effort, and discipline to achieve financial stability. But with the right tools and resources, you can take control of your finances and achieve your financial goals.
- Mint.com: A free online budgeting tool that allows you to track your spending, set financial goals, and create a personalized budget.
- You Need a Budget (YNAB): A paid budgeting app that helps you to live within your means, save for the future, and stop living paycheck to paycheck.
- The Total Money Makeover by Dave Ramsey: A popular personal finance book that provides a step-by-step guide to getting out of debt, building wealth, and achieving financial freedom.
Benefits of Budgeting
Budgeting is an essential aspect of personal finance. It helps you stay in control of your finances, make smart decisions, and achieve your financial goals.
Here are some of the benefits of budgeting:
- Helps you manage your money – Budgeting helps you track your income and expenses, so you know exactly where your money is going. This allows you to make smart decisions about how to spend your money, save for the future, and pay off debt.
- Helps you achieve your financial goals – Whether you want to save for a down payment on a house, pay off debt, or build an emergency fund, budgeting can help you achieve your financial goals. By tracking your income and expenses, you can identify areas where you can cut back and put more money toward your goals.
- Reduces stress – Financial stress can have a significant impact on your mental health and well-being. Budgeting helps you feel more in control of your finances and reduces financial stress.
- Improves your credit score – Paying bills on time and reducing debt can help improve your credit score, which can lead to better interest rates on loans and credit cards.
Overall, budgeting is an essential tool for anyone looking to take control of their finances and achieve their financial goals.
Frequently Asked Questions about How to Set Up a Budget Plan
Question 1. How much should I budget for different categories?
The amount you budget for different categories will depend on your income, expenses, and financial goals. However, a good rule of thumb is to follow the 50/30/20 rule. This means allocating 50% of your income towards essential expenses like housing, utilities, and groceries, 30% towards discretionary expenses like entertainment and dining out, and 20% towards savings and debt repayment.
Question 2. How often should I review my budget?
It’s a good idea to review your budget on a monthly basis. This will allow you to track your progress, adjust your spending, and make any necessary changes to your budget.
Question 3. How often should I review my budget?
After you’ve learned how to set up a budget, we recommend that you review your budget on a regular basis, either monthly or quarterly. This helps you to stay on track and keep making progress toward your financial goals. By reviewing your budget regularly, you can identify areas where you may be overspending and make adjustments to your spending habits accordingly.
If you experience a significant change in your income or expenses, such as a job loss or a major unexpected expense, it is important to review and update your budget as soon as possible. This will help you to adapt to the change and make any necessary adjustments to your financial plan.
Question 4. What if I don’t have enough money to cover all of my expenses?
If you find that you don’t have enough money to cover all of your expenses, it’s important to prioritize your expenses based on their importance. Start by paying for essential expenses like housing, food, and utilities. Then, look for ways to cut back on non-essential expenses like dining out or entertainment. You may also want to consider increasing your income by picking up a side job or negotiating a raise at your current job.
Question 5. Is it better to use cash or credit when budgeting?
This depends on your personal preference and spending habits. Using cash can be helpful for people who have a tendency to overspend with credit cards, as it forces you to stick to your budget and only spend what you have. However, using credit cards can be beneficial if you are responsible with your spending and use a rewards credit card to earn cash back or points for purchases you would make anyway.
Question 6. How can I stick to my budget when I’m tempted to overspend?
Sticking to a budget can be challenging, especially when you’re tempted to make impulse purchases. To help stay on track, try setting specific financial goals that motivate you, like saving for a vacation or paying off debt. You can also try using cash or a debit card instead of a credit card, which can make it harder to overspend. Additionally, you can create a spending plan that allows for some flexibility so that you don’t feel restricted and are more likely to stick with it.
Start Budgeting Today!
Don’t wait any longer to take control of your finances. Start budgeting today and take the first step towards achieving your financial goals. Remember, it’s never too late to start, and every little bit counts.