A budget is to help control what we spend, generally it also gives a clearer picture on how to spend our money. Budgets help us plan our future, pay off existing debts save money and reduce wasteful and impulsive spending. Good stuff! This week we are going to learn how to create a budget. Here are a few tips on how to create an effective budget:
1. Collect your financial statements
Gather all documents showing all your sources of income and expenses. Bank statements, receipts, invoices, utility bills etc.
This will help give you a fair account of your monthly income and expenses. At Diamond, e-statements are sent each month. Simply open a folder for these statements for easy access and retrieval.
2. Document all sources of income
Make a note of all sources of income for the month, such as: salary, other sources of income, gifts and refunds. All sources of income including your monthly salary must be documented and accounted for. Failure to do this creates the illusion that your salary alone accounts for your financial resources, this may lead to a distorted image of your financial state.
3. Create a list of your monthly expenses
Always make a list! We write out lists every day. “To-do” lists, “Ideal spouse” list, “Bucket” lists etc… It’s time we started writing the essential list of all: the “Budget” list! At the beginning of each month, make a list of your anticipated expenses. Allocate a specific amount of money to each expense and stick to it! Remember the golden rule to personal budgeting: Pay yourself first! When you get paid allocate a portion of your pay towards your savings. Put your savings into a separate account. Always save first and then tend to the bills. Healthy savings makes you independent and separates the women from the girls!
4. Separate your expenses into ‘NEEDS’ and ‘WANTS’
This is the trickiest part! After you have itemized these projected expenses, arrange them in order of priority. A new pair of shoes for instance, should not come before servicing your car (unless of course the shoes are comfy enough to walk in when your car breaks down) You WANT a new pair of shoes but you NEED to service your car! See the difference?
5. Total your income and expensesWhen you have done this, subtract your income from your expenses if you have a positive balance as the result…then way to go girl! If you have a negative balance, then something is wrong, you have to cut down on your expenses.
6. Review your budget regularly
This is important, as you go along there may be monthly expenses you need to increase or reduce in order to meet your financial goals. You should also do this monthly in order to keep track of how your actual spending matches against your budget. Don’t get discouraged if you don’t do so well in the first month, it gets easier with practice and discipline.