We all have financial goals; whether it is getting out of debt, paying off your student loans or saving up for your first home. Unfortunately, most of us find ourselves trapped in a financial hole and can’t seem to achieve even a single goal.
Often, the problem is not that we set our financial goals so HIGH and fail to reach them, rather it’s a case of lacking FINANCIAL DISCIPLINE – not being able to align our spending and saving habits with our financial goals.
Enter budgets…dun, dun, dun!
Different people have different concepts of what a BUDGET is or what BUDGETING entails, from these varying concepts comes misconceptions that leads to the “fear of budgeting”, one of the four biggest financial fears.
In order to get over this fear, financial experts advise that you should breakdown the task bit-by-bit starting with the simplest bit. For instance, instead of setting up a whole week’s budget you can set up tomorrow’s budget instead. This approach will gradually conquer your fear and set you up to a path of financial success.
Below I highlight tips that will help you overcome the fear of budgeting and help you setup your budget right:
1. Understanding the why
The first step to setting up a budget is to know why you are setting up a budget in the first place.
Is it to keep track your spending or keep track of your income? Identifying the reason why you feel you need a budget will determine whether your budgeting journey will be successful or not.
2. Having a plan
For every goal you want to achieve in life, there must be a corresponding plan. If your goal is to take up budgeting then you should create a plan of how to make it possible.
For instance, you need to create time and set up systems that will facilitate your budget making process.
3. Set your financial goals
The fundamental reason for setting up a budget is to meet certain financial goals such as getting out of debt.
Once you’ve determined the kind of financial goals you want to aspire for, you should set up your budget with these goals in mind.
For instance, if your financial goal is to get out of debt, you should determine the duration you intend to pay off the debt and decide what sum of minimum monthly repayments need to make to reach your goal.
Once you’ve determined the amount, you can put it on your budget and make necessary adjustments in other areas of your life to make it happen.
4. Find a SIMPLE budgeting tool that you can use
Budgeting tools such as spreadsheets and mobile apps are an excellent way to keep track of your budgeting. To start, you should find a simple budgeting tool that can help you get the job done in a simpler more efficient way.
5. Determine your net income
Knowing how much money comes in from your various sources of income is the first step in budgeting. First, you’ll need to add up income from your various sources then subtract the obligatory deductions such as taxes, 401(k) contributions, social security etc.
The remaining amount is what we refer to as net income.
Here’s the formula written out clearly:
All Income – Obligatory Expenses – Expenses In Step 6 = Net Income
6. Break down your spending
There are three different types of expenditures.
i. Fixed expenses
Fixed expenses are those that remain the same month after month such as rent/mortgage, minimum loan repayment amount, insurance premiums among other fixed costs.
ii. Variable expenses
Variable expenses are those that vary from time to time such as groceries, utility bills, car maintenance costs etc.
iii. Discretionary expenses
Discretionary expenses are those expenses that are not necessary but are incurred nonetheless; such as movies, Netflix, golf club membership and so forth.
Out of sight, out of mind. This is a common saying, which means that you easily forget about someone or something when you can’t see it or them.
This saying applies to budgeting too. When you set up a system that ensures that you automatically make payments and settle outstanding bills without your physical input you are well on your way to budgeting success.
Not being able to physically see or touch the money eliminates the temptation of misusing it hence ensuring that the money is used for the intended purpose.
8. Set up a micro budget
As highlighted above, the budget making process can be overwhelming if not approached in the right way. To make the process much easier, you can break up your budget into small manageable bits.
For example, you can weekly or even daily budgets when first starting out.
9. Reward yourself
To some, budgeting sounds like self-deprivation where you consciously deny yourself the rewards of your hard work in order to meet some financial goal in the future.
That assumption is not entirely correct.
Budgeting does involve some aspect of self-sacrifice and delayed gratification; however, rewarding yourself in some guilt-free indulgence should be part of the process.
For instance, once you’ve stayed within your set budget over a given period you could decide to treat yourself to a movie or a night-out with friends. The secret is not to overdo it and to plan for it in the discretionary expenses column of your budget. This simple yet ignored activity will help you stay in track over the long-term.
10. Adapt and Adjust
Making the transformation from unplanned spending to sticking to a budget is not easy.
Sometimes you may find yourself sliding back to your old aimless spending habits. Some elements of your budget might surprise you, others might shock you. The answer is not to panic, worry or abandon the process halfway; you should aim at adapting to your new situation step-by-step and if you encounter challenges, you should aim at making necessary adjustments as soon as possible.