Everyone talks about achieving financial freedom, but it is easier said than done. In our previous article ‘4 Personal Finance Tips for Young People’, we identified having a budget as a key tip for people looking to improve their personal finances (and for young people in particular). Especially with all the everyday expenses we all face, it is easy to overspend and lose track of where all the money goes. Learning how to control finances and stick to a plan will help solve these problems.
Read on to learn five specific tips for designing an effective budget.
- Calculate Your Income
It may sound simple, but calculating how much you make is a crucial part of developing an effective budget. Start by listing down all your different sources of income –– regular job, baby-sitting, tutoring, investing, doing side gigs, etc. Even though some of these jobs may seem fairly minor, you might be surprised when you sit down and do the numbers how much you bring in from different sources. Adding it all up helps you to develop a confident understanding of how much money you can start your budget with.
- Schedule Your Monthly Expenses
Everyone has monthly expenses that need to be paid regularly, and an easy way to take care of these is to set the payments on a schedule. CNBC provides a comprehensive list of common expenses to consider when creating a budget. For example, if rent is due on the 1st, electricity on the 10th and internet cost on the 15th of every month, set these expenses automatically into your budget for scheduled payments. After scheduling the payments, you don’t have to worry about them anymore, so you can relax and focus on other things (and subtract their total amount from the money available to you each month).
- Record Every Expense
Money is hard to make, but easy to spend. To help control spending, make a habit of recording every expense, no matter how minimal it may be. For example, if you bought coffee for $4 five days a week, this would add up to $20 a week. If there are 4 weeks in a month, you would know that you spent $80 on coffee for that month. Things that seem minimal can add up to be quite significant. But recording every expense and adding them all up at the end of a month will give you clarity on your spending habits, such that you can make decisions of what things to spend less on, and how to maximize your budget.
- Set Specific Goals
It’s easy too think of budgeting in a general way. You record income and expenses, gain a better understanding of your finances, and that’s that! As a budgeting guide at AskMoney points out however, it’s all the more effective if you set up specific goals for your budget –– ideally taking into account both short- and long-term priorities. For instance, you may be eyeing a vacation in three months, and hoping to buy a house in two years. By identifying clear goals like these, you can target your efforts such that you can prioritize and save in a more strategic manner. You may well find that this helps you stick to your budget more completely.
- Use Online Programs
Finally, remember that all of the above can be done electronically and with the help of some useful tools, also. A New York Times guide to budgeting apps points to a number of different options (from YNAB to Simplify) that will help you modify your spending, set financial goals –– and most importantly, stick to those goals. These apps are easy to access, and today they’re helping countless people to get better control of their finances.
Designing an effective budget seems tedious, and in some cases it can be. But it’s well worth it to gain greater financial independence, and it can make a positive impact in very short time.