What is Budgeting? How to Create A Budget That Works?

In the simplest terms, a budget is a plan — a plan to spend your money. The process of creating this plan is called budgeting. Budgeting is not magic; however, it presents a unique position to gain financial freedom and stress-free life. Creating a budget allows you to determine early on whether there is enough money to do the things that you want to do or would like to do.

One of the underlying advantages of having a budget is that it allows you to prioritize your spending. It will enable you to highlight where your money is going and focus on essential things for you.

Here’s how to set up a budget:

Understand the Process

There’s more to the budgeting process than just arranging numbers on a piece of paper. The budgeting process has to first come from the heart. It should be something that you are willing to do. You must first understand what your goals are. The goals for the way you spend your money will help you make smart spending choices. When setting your goals, they need to be as specific and as measurable as possible. Ask yourself; in one year, what will my finances look like?

Avoid complicating things- try a simple budgeting plan

Start simple and build on that. Whether you are creating your budgets on a piece of paper or using software, make it simple. Fewer categories are what you should be aiming for. If you are starting in this process, try creating your budgets on a piece of paper. Most of the budgeting software you will find will ask you to fill out millions of categories and subcategories. While all these are important in tracking where your money is going, I do not recommend it. What we recommend here on EquityMovement247 is keeping the budget simple and adding the subcategories as you go.

Understand where your money is going to

Where is your money going? Determine that. In our previous article, we discussed keeping a spending diary, which will help you track your incomes and expenses over time. You must understand that there is a fundamental difference between needs and wants. Ask yourself; do I want this, or do I need it? Allow up to 50% of your income for needs and 30% of your income for wants. Some of the questions you need to be asking yourself are; will spend this money this way get me closer to my financial goals? Can I do without it? These questions will help you discern what your needs are and what your wants are.

Save! Save! And Save Some More!

Still, in our previous article, we articulated the importance of saving. Commit at least 20% of your earnings to saving and debt repayment. To help you develop a savings habit, you can automate the process where your savings percentage is cut off from your paycheck immediately.

Budgeting should be fun! Remember, “pay yourself first!” we recommend the 50/30/20 budget plan. This is where you spend about 50% of your after-tax income on necessities, no more than 30% on your wants, and at least 29% on savings and debt repayment.

This plan is so simple; over the long term, if you follow this plan diligently, you will have manageable debt and more room to indulge occasionally, and savings to pay unexpected expenses, and even retirement comfortably.

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