Budgeting can seem to be overwhelming, especially for those who are new to managing their finances. From the viewpoint of Scott Tominaga, a well-known financial advisor, pursuing the right strategies is key, enabling anyone to create a budget, simplifying them to have control over their finances and thereby accomplish their financial goals. This article aims to guide individuals about the basics of budgeting and provide easy steps to support them get started.
Understanding the Importance of Budgeting
A budget is beyond merely a list of income and expenses; it is an efficient tool that enables one to make sound information-driven financial decisions. It shows them where the money is going, enabling them to care about their spending habits, and assisting in saving for future goals, regardless it is for buying a new car, saving for retirement, or creating an emergency fund. In so doing, it will help curb unnecessary liabilities of debt, create a logical roadmap to achieve financial security, and get rid of financial stress.
Steps to Follow
Step 1: Evaluate Financial Standing
To create an effective budget, the foremost criterion is having a clear idea of one’s current financial situation. It needs individuals to gather all their financial statements such as pay slips, bank statements, bills, etc. Calculate the total income by adding up all sources of income, such as salary, bonuses, etc.
Next, monitor and list the spending. Sort them into two categories: fixed expenses, such as rent or mortgage, bills for utilities, and insurance premiums, and variable expenses, such as groceries, dining out, entertainment, etc. Individuals should make sure to record all expenses in a spreadsheet to record each spending to get a clear insight into their spending habits. The whole objective is to pinpoint the areas where they could be overspending.
Set Realistic Goals
Once after having a clear picture of their finances, it’s time for them to set certain financial goals. Think of both short-term goals such as saving for an emergency fund while long-term goals should include, saving for a home, retirement savings, etc. The goals must be SMART signifying specific, measurable, achievable, relevant, and time-bound, as per Scott Tominaga.
Step 3: Set the Budget
Now once the financial situation is assessed and goals are set, it’s time to formulate a budget. There are several methods of budgeting methods enable individuals to choose an ideal one for them.
- Zero-Based Budgeting: the method requires individuals to distribute every dollar of their income to specific spending, debt repayment, and savings, ensuring their income minus expenses becomes zero.
- 50/30/20 Rule: Allocate 50% of the income to meeting needs or essentials, 30% to wants or non-essentials, and 20% to account for savings and debt repayment.
- Envelope System: Have some physical envelopes to allocate cash towards different spending categories, enabling individuals to stick to their limit.
Among all these methods 50/30/20 rule is the most popular and simple one, however, depending on personal preference and lifestyle one can opt for the method that suits them best.
Step 4: Monitor and Adjust
Formulating a budget is just the first step or beginning. Make sure to review spending on a daily basis – as it helps to stay on the right track. Sit at the end of every month, have an overview of the budget, and make necessary adjustments as needed.
Last but not least, while one does not have control over essential expenses they can limit their expenses in account of non-essential or ‘want’ or to stick to saving which is the key to achieving their financial goals.
