Most budgets fail because they are based on income instead of spending. People look at how much money they have and then try to find the best ways to spend it. This is the quickest way for an individual to become broke. Instead of focusing on income, focus on spending. Regardless of how much money you make, establish a spending plan that covers your necessities and provides for savings. Everything else is unnecessary spending.
Many people start with income when creating a budget and end up broke. Income-based budgeting typically attempts to stretch money farther than it can go. A great example of this type of budgeting is the government. The federal budget allocates every dollar to be spent, then nothing is left to cover unexpected expenses or emergencies. Think about how you budget your money. Did you start by calculating your total income first? Or did you calculate your required expenditures first?
Here are a few tips to help you budget money more effectively.
1. Start with Fixed Required Expenditures
Budgeting is not based on how much money you make. It is based on how much money you anticipate spending. Start by calculating your fixed required expenditures. Required expenditures are only those expenses related to your home and vehicle. Required expenditures include:
- Homeowners Insurance
- Car Payment/Insurance
These items should be at the top of any budget. If everything else goes wrong, you will still have a place to live and a mode of transportation. Taking an online course can help you calculate your required expenditures and start a realistic budget.
2. Included Variable Required Expenditures
Once you have figured out exactly how much money you need to spend on fixed required expenditures, you can allocate money to variable required expenditures. These are things such as groceries, gasoline and savings. You can’t live without them, but you can control how much you spend on them. To accurately calculate these expenses, you will need to track your expenditures for a few months. This will give you an idea of how much you are spending on them. You can increase or decrease this spending according to how much money you have after fixed required expenditures are paid for.
Savings is included in the category. Things will go wrong. Emergencies do happen. You need to make sure you have set aside enough cash to cover these unexpected expenses. Many financial advisers include retirement savings in this category. It is a good idea to save for retirement if you can afford it, but you still need emergency savings first.
3. Everything Else
Now that all required living expenses have been calculated, add up any additional spending you want to do. This spending includes entertainment and vices. These things are optional and should be allocated only if you can realistically afford them. You should have a good idea of what you can realistically afford after calculating your required expenditures.
Additional savings and debt reduction fall into this category. You might want to account for them before allocating money towards entertainment or vices. However, they are listed as optional because they can be put off if you don’t have the money for them in any given budgeting period. An online course can teach you how to budget your money.
You do need to calculate your total income when allocating money, but it should not be the foundation of your budget. Required living expenses should form the foundation of your budget. Everything else should be allocated according to the amount of additional money your have.