A budget is one of the most crucial tools you need to have in your financial plan. With a budget, you can ensure that you know exactly where your money is going each month. That means that you’re less likely to accidentally overspend in any specific area.
However, some budgets are more effective than others. While it takes time to find the spending strategy that works for you, there are some common components of a successful budget that seem to be shared for everyone.
Here are just some of the common ingredients of a successful budget.
1. Accurate Spending Categories
The easiest way to manage your budget is to figure out where your money goes each month and split your expenses into “spending categories.” These categories might include things like:
- Food
- Housing
- Utilities
- Insurance
- Loan repayments
To ensure that your budget works, you’ll need to make sure that you’re breaking your money down to the right number of categories. You don’t need to go over the top by assigning a category to every individual kind of food you buy, or every form of entertainment your invest in each month. However, some people find that smaller segments can give them a clearer picture of where their money is going.
2. An Accurate Understanding of your Income
Spending is just one crucial component of your budget. To ensure that you’re using money wisely, you’ll also need to understand how much money you have coming in each month. Sit down and make a list of all the places where you get money each month. One obvious entry will be your job. However, you might also get support from the government in the form of things like child tax credits, or council tax relief.
Keep every source of income in mind – including any dividends you have on investments – and you’ll be able to ensure that you’re getting the most out of every penny that you earn.
3. The Right Attitude
A lot of people assume that good budgeting is just about watching where their money is going. However, you also need to make sure that you’re willing to make changes if you realize that you could be spending less in certain areas.
For instance, when you take out a loan, you shouldn’t just be taking the first loan that’s offered to you. Instead, you need to look for the option that comes with the lowest fees and smallest possible amount of interest on repayments. In the same way, when you’re paying for things like utilities, insurance, and other monthly expenses, make sure that you’re not paying over the odds by comparing your options regularly. Sites like HappyPenguin.com offer a loan brokerage and matching service which endeavor to match you with a perfect lender.
4. A Savings Strategy
Savings shouldn’t just be something that’s “nice to have” if you have enough cash left over at the end of your budgeting session. Instead, you should build your savings into your budget as one of the must-have expenses that comes alongside your rent, insurance payments, and car fees.
Savings, whether they’re dedicated to a specific goal, or designed to help you in emergency situations, can stop you from getting into dangerous positions with your cash. That way, you can get your downpayment for a house, buy Bitcoin, or have money to start your dream business. If you treat your savings like an expense, you’ll make sure that you’re not left unprepared when disaster strikes.
5. Realistic Goals
While anyone can make and follow a budget, sticking to your spending strategy won’t always be easy. There will be times in your life when you want to buy something that you can’t afford, and you’ll be tempted to throw caution to the wind. When the going gets tough, the only thing that will keep you on track is a goal that you can commit to.
The right savings target will remind you why you’re pushing yourself to budget so carefully in the first place. When you know that buying an extra chocolate bar at the supermarket means that you’ll have to add a week onto your deadline for making a deposit on your new house, you’ll be less likely to make that seemingly insignificant purchase.
6. Flexibility
Finally, it’s important to stick to your budget once you’ve established it. However, that doesn’t mean that the decisions you make are set in stone. Budgets aren’t a set-it-and-forget-it concept. As parts of your life change, including your income and expenses, your budget will need to adapt too. Remember to keep going back to your budget and asking yourself whether it might be time for an update.
You can even just change your budget if you feel like your current strategy isn’t working as well as you would like it to.
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