Budgeting is a way to control our finances in order to minimize our spending and improve your financial situation. It is easy to get carried away when buying stuff thus wasting our hard-earned money. Everyone should draw up a budget. It is great tool which helps us see what we are doing with our money.
Budgets can also be used in order to calculate how our spending deferred from our target, that is, the variance.
Building a budget is an easy thing to do if you know the proper estimates for your targets. That is where most people go wrong and so stay away from budgeting. So this post will help you plan an ACHIEVABLE budget and how to use it to improve your spending. What you will need is either a spreadsheet or a piece of paper, your choice. I will be using Microsoft Excel (Excel is part of the Microsoft Office, a software pack which is essential for your office/ day-to-day life) to illustrate the examples.
Plan a budget
1. Calculate the budget income
If you thing that budgeting is all about costs, then, you’re wrong (sorry?). Income plays a big part in budgeting as costs do. Our income tends to vary from month to month. This could be due to taxes, overtime or side jobs. In order to plan your budget, first you need to calculate the budget income. Take a look at the following extract:
The income working should include all sources of income. The amounts should be the lowest possible amounts so that you do not overestimate your income.
2. Splitting of expenditure
Putting it simply, there are two types of costs: Fixed and Variable costs. Fixed costs are those which remain the same month after month (for example rent or car payments). Variable costs are those which change every time (for example food costs). One-off costs ( ex yearly insurance) can be grouped with the variable costs. So start thinking about all your expenses for the month and split them into these two categories.
3. Estimating target costs
After listing all of your expenses, start thinking about how much each one has cost you on average over time. Assuming that you want to minimize those expenses, reduce your variable costs (as fixed costs are harder to reduce) by a reasonable amount ex 5% and set these as you new target costs. Do not try to reduce the costs too much at one time. It is more realistic and achievable to reduce costs over time. Fill in all the expenses with your budget amounts and add the totals. After finishing this part, it should look something like this:
4. Take a safety percentage
Our estimation of variable costs does not take into consideration any small unexpected or unforeseen costs. So in order to have a safety net for those expenses, take about 20% of the variable costs (all fixed costs should have been included as those are easily foreseen) and add it as a cost itself. This safety net percentage changes from budget to budget so pick a percentage which seems like a reasonable compromise to you. You can also add a safety percentage to your fixed costs if you think you might have missed something.
5. Calculate budget savings
Well, this is pretty straightforward. Income-Expenditure= Savings.
Calculating the difference between what you budgeted and what you actually spent is essential. Not only does it let you keep track of how much you spent, but it also allows you to identify flaws in your budget and allows you to identify where you need to work harder. So, how do you figure out a comparison?
A. Add a column
Add an actual amounts and a variance column to you budget, like this:
Fill in the actual column which how much you spent.
Subtract the actual amounts from the budgeted amounts in the variance column to find how you went.
This is what your final budget should be similar to:
- Budget Income
- Budget costs split into variable and fixed
- Safety percentage
- Work out savings
This plan should help you plan an achievable budget and will help you find your budget’s strengths and weaknesses.
Do you have you own budgeting method? Or have you tried this method? Tell us about how you went in the comments section.