The end of year or start of a new year is a great time to do budgeting. Did you start working on your 2018 budget?
We already know why a financial plan is needed but today you will learn how to create your budget. Some people use the word budgeting when talking about creating a financial plan.
A budget helps you keep track of your expenses to make sure that you are spending less than your income. It is advised to prepare a yearly budget to visualize how and where your money is going.
Budgeting on a monthly basis is then followed so that you can ensure that your yearly plan is achieved. It also gives you time to adjust your expenses or income if needed so that you hit your budgeting targets.
In the below video, you can get a simple explanation of how the budgeting process works.
Here are 3 steps to help you create your budget:
Add up your income (Net income):
This is the first step in a budget plan. Add all kinds of income you are receiving in a year, however, cut off any pay that you are not taking home.
For example, if a percentage of your income is deducted automatically to pay taxes and health benefits then don’t include this specific amount of money in your total income. Any source of income should be added such as salaries, pensions, and remittances.
Estimate your expenses:
This is the second step of a budget plan. Estimating expenses is not as easy as it may seem especially if you’re a kind of person whose expenses change dramatically. If so, get a rounded estimate by calculating an average for this significantly changing expense. Find the sum of your expected expenditures including both fixed and flexible expenses.
Calculate the Difference:
After calculating your Net Income and your Total Estimated Expenses, subtract the 2 amounts and get the difference. This result is the end product of your yearly budget plan.
If your result is a (+ve) number, then you are spending less than your earnings. Congratulations, this is the amount of money you are gaining and you are a step towards building your wealth. But if your result is (-ve) number, then you are not spending within your means and the number you obtained is your loss.
By following the above steps, you have successfully created your yearly budget! However, keep in mind that your budget plan should be flexible and you are advised to update it regularly according to your circumstances!