A budget is a tool used to set your household’s financial goals (expenses versus income) on a monthly average basis.
What’s behind the phrases “getting out of the red” or “living within your means”? The answer is balance balance between expenses and income. This kind of balance is achievable, and using a budget can help you get there.
Think about these words: “building a budget.” Sometimes they roll off the tongue like something new and unfamiliar. Why? Because in school, we learned so many important things history, math, language but one crucial thing they didn’t teach us was how to manage our finances and build a budget. They forgot. The important thing was that we learned the Pythagorean theorem. No worries what you didn’t learn then, you have the opportunity to learn now. And our first message is this: building a proper budget needs to be done in stages.
So let’s start from the beginning.
What Exactly Is a Budget?
A budget is a tool used to set your household’s financial goals (expenses versus income) on a monthly average basis.
Building a budget happens in several stages:
- Setting priorities
- Creating an initial budget
- Review and monitoring
- Adjusting and improving the budget
- Setting Priorities
To achieve our goals, we first need to set them. Simply being aware that we need to establish priorities is the first step. Most of us navigate our financial lives with daily expenses as our primary focus. This focus on day-to-day management often distracts us from the goals and dreams that truly matter to us.
To build a budget that takes into account what really matters to you, you need to define your priorities. Every household has its own priorities, and a “Budget Preparation Tool” can help with this process. In this document, you’ll define which expenses are important to you, and it will serve as the foundation for building a budget that fits your life.
Here’s how to get started:
- List your current income and expenses. Check what the gap is between expenses and income.
- Decide which categories you can reduce to achieve balance between income and expenses.
- For each category, note the level of difficulty required to cut back on that expense (“easy,” “challenging,” or “not touching right now”), considering the amount you’re currently spending.
- In categories where you’ve decided you can cut back, you’ll need to set a new amount (monthly average) that you’ll follow over the coming year.
At first glance, you might feel like you can’t reduce your expenses, but usually, with a second look, you’ll find many expense categories where you can be more efficient and trim down. A similar process should be done with income categories, with one difference there, we’re not looking for ways to reduce but rather opportunities to increase income.
Just as important: To maintain household harmony and not just manage your finances efficiently if you’re in a relationship, each partner should examine where they themselves can help reduce expenses, rather than looking for places where their partner can do so.
- Creating an Initial Budget
- Write down a budget for each category – After you’ve examined your options for reducing expenses, write down in the budget column of your income and expenses form the amounts you’ve agreed upon. This is your budget for the coming period.
- Add everything up – Total all expenses and income in the budget column.
- Pay attention to the breakdown into categories in the expense column: fixed monthly expenses, periodic expenses, and variable expenses.
- Review and Monitoring
After totaling the amounts in your monthly expense and income columns, check whether you’ve achieved balance (a reality where total expenses don’t exceed total income). If so, you’ve achieved a budget that allows for balance.
Monitoring your budget is done through expense tracking. You can do this using a free budgeting app. Through the app, you’ll get a complete picture of your financial situation, be able to better plan your income and expenses according to the budget you set, and start stabilizing and growing financially! By using the app, you too can plan and control your financial situation, manage the present, and plan for the future.
- Adjusting and Improving the Budget
If you haven’t yet achieved balance, repeat the steps outlined above until you reach full balance. For many households, this process happens in stages, not all at once: in the first stage, you significantly reduce your monthly deficit, and after a few months, you return to build a new budget that closes the deficit and even leaves an amount for dealing with debt or for savings. The more the final budget is planned to leave a larger available amount, and the sooner the final budget is set, the faster the process will progress.
You’ve built a budget – in the next stage, we’ll explore how to live by it.
Ready to take control of your financial future? Start with one small step today. Your budget is more than numbers on paper – it’s your roadmap to the life you want to live.
