How to Budget in 6 Simple Steps - The Wealthy Post (2024)

The word budget, unfortunately, evokes the wrong emotions in most people, most people are either bored or scared or both

Being scared isn’t a bad thing but just like any new and worthwhile endeavour you want to undertake, you don’t let fear stop you, instead you focus on the goal or advantage and keep moving.

If you’ve never created a budget before — or simply need a fresh start on the one you’ve already got — we’re here to help.

Regardless of your income and financial situation, a budget is one of the most important tools at your disposal

There are a few things about budgeting

1. A budget is a plan, which means it’s about the future, it’s forward-looking, it’s being proactive and intentional. You get the drift
2. It requires consistency. I can’t stress this enough if you are doing this for the first time you won’t be a pro immediately, you have to keep at it
3. Budgeting is foundational to manage our finance, control our spending and achieve our financial goals
4. Historical budgeting records shows us an accurate (not assumed) picture of our inflow and outflow, this helps us understand our habits, what’s important to us, And noticing those trends is an essential step in identifying our behaviours, patterns and triggers

These six steps offer clear guidance on how to make and stick with a budget, lets roll.

I know the burst of happiness we experience when our paycheck hits the account, you just feel better with a well-padded bank account

The amount that hits your account is your net income, which is usually after tax and pension contribution

When calculating your income, be sure to include all sources e.g If you have multiple jobs, side hustle, rental income e.t.c

Top tip for those that are either self-employed or have a fluctuating income, use an average monthly income or an estimate of the income you expect to receive in a particular month

So you have sorted out the income side of your budget, the next step is to determine what is going out.

First step – break your expenses into categories such as housing, food (including restaurants), transport, utilities, savings and investments etc

Use your account and credit card statements for the last 3 months to determine how much you are spending in each category and maybe new categories like vacation, clothes etc

Some expenses will be fixed monthly like rent or mortgage payments while others will be variable like food, don’t forget seasonal (Christmas gifts), one-off, annual payments (Birthday gift, subscription) and short-term goals (new phone). Divide the annual expenses by 12 to know what the monthly budget will be. This is where sinking funds shine

For couples, there will be personal and joint expenses and there are different ways to go about budgeting for couples but personally, I advocate treating both incomes as one and all expenses in a single list, but this doesn’t mean that you have a joint account for everything but you look at your income and expenses as one.

Take your monthly net income calculated in the first step and subtract your essential expenses (including the non-monthly ones – divide the annual cost by 12), these are expenses you need to live, expenses like your rent/mortgage, transport, food, utilities, car service, professional fees, insurances, savings, investments, giving, debt repayments etc

The idea here is to identify which expenses are essential to you and because personal finance is very personal, this will vary from person to person for example my Netflix subscription isn’t a must-have to survive but it’s essential for me today

Essential in budgeting always start with the basic 4 - Housing, food, transport and Utilities

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Once you have subtracted the cost of your essentials from your income what is left is how much you have available for discretionary spending.

If this number is positive congratulations but if it’s negative, then you have to cut back on the essentials till you get to zero, you could decide to reduce your eat out/restaurants which will affect your transportation etc

Whatever you do you have to make the hard decisions and get to zero when you subtract expenses from income because if not you will either use debt or overdraft to finance the difference

Crafting the right budget means finding a balance between your present and future lifestyle

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Now, this is the execution phase, what’s the point of a plan or budget if you won’t implement and track your expenses?

Commit to doing this daily, there are apps that help with this or you can write on paper, use the notes app on your phone, spreadsheet etc

This step is to enable you to achieve the set goal, plan and budget, if we wait till the end of the month we will be miles off our plan and this defeats the purpose of the budget in the first place

For me, I use the good old spreadsheet but try different tracking methods and pick what works best for you, the most important thing is to make it a habit.

With this step, you get the opportunity to review and adjust weekly before you are way off track, imagine you set out to eat out with £200 for the month and in the first week you have spent £100 that means you have spent half of your budget in this category and you know what’s left instead of realizing at the end of the month that you have spent £300

To adjust also means to move things around during the month to compensate for additional spending for example you can take £50 from your clothes category and add it to your eating out category, keeping your budget balanced

Aim to review and adjust weekly, this will ensure you control your money and that your income and expenses equal zero

Another aspect of the review is the monthly ones, during this review you ask questions such as

• What went well?
• What didn’t I do well?
• Where can I improve?
• Has anything changed?
• Did I get closer to my goals?

Rinse and repeat. Set a budget, track daily, review weekly and monthly.

You will make mistakes, the unexpected will happen but don’t stay down regroup and get on with it.

When life will happen that is enough to destroy your budget hopefully you have an emergency fund to deal with it, if you don’t have an emergency fund it’s important to build one now, you don’t want to be caught with your pants down, the ideal amount is 3 – 6 months of your expenses

Budgeting is about consistency, it’s not always fun but it’s worth it.