How to Budget Properly

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by ratewise

Today we would like to talk about a topic that directly influences the daily life of every person on earth. This topic is how to budget. This is something we do not learn anywhere at school or university, but yet we are expected to manage our finances successfully.

For the reason that we do not get a good education on how to budget, most people find it very difficult.

Poor budgeting skills can be directly tied to poor financial management. Poor financial management in return has a direct influence on your quality of life.

This is why it is important to know how to budget so that we can make the most out of our financial position and in return make the most out of our lives.

What is a budget?

A budget is a summary of your financial position, including all of the income you receive and all the expenses you have. It is set up so that you can see what the things are you need to spend money on and also so that you can see how much money you might have left.

And of course, to make sure that you don’t end up with too little money to pay all your bills.

How to budget

1. Organize

This includes collecting all the paperwork and the details of your finances. It might include things like your payslips, credit and debit card statements, bills, and any other expenses or purchases that you have made.

Get all of the paperwork together and work out a system for how you can organize everything. Having a good filing system is not only beneficial for efficient budgeting, but also for keeping a record for other reasons like filing taxes.

2. Calculate your income

The next step in learning how to budget is to calculate your income. This includes your income from all your income streams. Make a list of all your income sources, including your salary, investments, and anything else you might get money from.

You can have all the records of the last few months and you can make a list for each month. This will give you a good general idea of what your past earnings are monthly and quarterly.

You can then use this to predict your probable income for the next month to figure out your budget.

Having all of these things organized is also great for planning to save up for something big, like a vacation.

3. Calculate your spending essentials

Take note that the next step is calculating only your essential spendings, not your total spendings. By doing this you prioritize all the bills that you could live without them being paid.

This will be your expenses like mortgage, food, rent, healthcare, childcare etc. These things you cannot go without and therefore they have to be covered first, before spending on anything else.

So you will have all the paperwork of your spendings over the last few months. Make a list of everything that you have spent money on in this essential category. Add them all up. This total will form your essential spending total.

Next, you subtract your essential expenses from your total income. This will show you how much money you have left for non-essential spending. This is also called your disposable income. It can be used with more flexibility as we will see below.

4. Calculate your disposable income

Disposable income is for things that are not included in your essential spendings, things like leisure, going out, entertainment, savings, etc.

As with the things above, gather all your paperwork of the last few months to see what you have been spending your disposable income on.

Many times you will find that you have too much unnecessary spending, and this is the reason for a budget, to make sure that your unnecessary spending does not put you into the red.

By looking at the regular things that you have spent money on in the past months you can work out an average and you can predict your spending of the month to come.

After you subtract all your usual nonessential expenses, you can see if you have any cash left for some other things you might want to spend money on.

5. Work out a realistic budget and try sticking to it

After seeing what your spending habits have been in the past you can calculate what you will spend money on in in the future and that is how to budget.

You can use this to tighten up your spending habits and make sure you spend money on the right things.

We hope this article has given you some tips on how to budget.

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Categories: Personal Finance
Tags: How To