How to create a budget. Here are 5 steps that work.

Sep 21, 2022

What did you spend money on last month? If you cannot answer this, then you need to take budgeting seriously. Have you ever gone without a list to the store to buy something? In most cases, you end up buying what you do not need, and this realization only comes when you have exhausted the money. So now you are left with regret and an unnecessary possession.

The absence of a budget is one of the reasons some people wake up later in life and start to wonder, "What did I use all my money for?"

You wouldn't want to do that given the state of the economy. Would you?

What is a budget?

A budget is a strategy for making financial decisions over a specific time frame, typically a month or a year.

What data do you need to create a budget?

When creating a budget, you need to consider a number of things. These include, but are not limited to:

  • Income
  • Debts
  • Savings plans
  • Assets/Investments
  • Insurance
  • Groceries
  • Light bill
  • Transportation

What is a monthly budget?

A monthly budget is a plan for your monthly financial spending because many recurring expenses, such as rent, utilities, and other payments, are made on a monthly basis.

Your budget should ideally involve spending less each month than your income, leaving you with extra cash to save. Budgeting for more than your monthly income necessitates using up savings or taking out loans to cover expenses.

How to make a monthly budget

1. Calculate your monthly income

Identifying your monthly income is the first step in creating a budget for the month. You must be careful while creating your budget to avoid going into debt in the long run by not spending more than you earn.

Consider stable revenue streams when figuring out your monthly income. Your paycheck should be mentioned. Use your net income, commonly referred to as your "take-home pay," to determine your income. This is the money that is still in your account after paycheck deductions. Your net income is the amount of money you make that you can really use to save, pay bills, or purchase other necessities.

2. Think about your financial priorities.

Rent, food, and electricity are among the bills that everyone must pay. However, if you aren’t putting in the effort to keep an eye on your spending, it’s easy to spend far more than you expect on nonessential things. For example, you may be spending thousands of naira each month on takeout or spending too much money shopping online.

Setting up a budget doesn't mean spending all of your money on necessities. The focus should be on spending your money in a way that is sensible for you. Consider your financial priorities and objectives, as well as your personal happiness. When you see how much you're spending on particular items, you might want to experiment with changing your spending patterns to boost your savings.

3. Design your budget

Once you’ve considered your priorities and how they align with your spending habits, you can sit down and plan your future spending.

It’s wise to pay yourself first. One of the first things you should put in your budget is savings, whether it be for an emergency fund, a new car, a down payment on a home or other purposes. According to investing legend Warren Buffett, don't save what is left after spending; instead, spend what is left over after saving. Next, consider your spending patterns and how they relate to your priorities.  If your actual spending is already aligned with your goals, you can use your spending history as a guide for your budget.

The 50/30/20 budget guideline is a well-liked guiding principle for creating a budget. According to the rule, you should set aside 50% of your income for needs, 30% for wants, and 20% for savings. It's up to you how you divide your money across these areas.

4. Track your spending and refine your budget as needed

Budgets are dynamic financial plans. They are not inflexible. You should keep track of your expenses after creating your budget and make an effort to stick to them. For example, you can track your electricity history using the BuyPower App. You can download it from Playstore or Appstore.

You might discover, though, that as time goes on, your goals and circumstances alter or your spending patterns diverge from those you had anticipated. Take a look at your budget and how well you adhere to it every six months or yearly. You can adjust your budget to reflect changes in your income and spending patterns.

5. Get a budgeting app

With the aid of budgeting apps, you can create a budget, keep track of your spending, and plan out payments—all the tools you need to manage your money. Being available on Desktops and smartphones makes it simple and convenient. The eight top budgeting apps, according to Forbes advisor, are as follows:

  • Personal capital
  • Mint
  • Ynab
  • Pocket guard
  • Good budget
  • Stash
  • Honeydue
  • Digit

To learn more about them, click here.

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