Creating a budget is one of the best habits that can assist you in managing your finances more effectively. A budget can help you see where your money is going and what you need to do to control your expenses and increase your savings.
Moreover, sometimes what not to do is just as important as how to manage your finances. Let’s delve into what a budget is, why it is necessary, and how to create one. Not only that, but we will also discuss 7 common myths about budgets that are prevalent among people.
What is a Budget?
Money holds significant importance in life, but managing it properly is equally crucial. Sometimes, expenses seem to escalate to the point where it becomes unclear where the money is going. That’s where budgeting comes in!
In simple terms, a budget is an estimate of your future income and expenses. You can create it for a month, a year, or for a specific goal. Governments create budgets, companies create budgets, and you can create your own budget, regardless of your income level.
Why Understand the Importance of a Budget?
To keep track of monthly expenses: A budget tells you where your money is going. It helps you understand the difference between necessary and non-essential expenses.
To prepare for future uncertainties: Life sometimes throws unexpected challenges. By creating a budget, you can save for such situations.
To achieve your dreams: Whether you want to buy a car, go on vacation, or take a course, a budget helps you achieve your goals without debt.
7 Steps: How to Create a Budget?
The process of budgeting is generally the same for everyone, although you can adjust it based on your financial situation and goals.
Evaluate your income
Add up all your earnings from various sources, such as salary, bonuses, interest income, investments, and others.
Track your expenses
Keep an eye on all your expenses for a month, whether you are going out, making credit card payments, cash transactions, or dining out. This will help you understand your actual expenses. You can also categorise your expenses as necessities, wants, and savings.
Set financial goals
It is better to define your goals and think about how you will achieve them beforehand. To create a budget, you will need to set your financial priorities, such as paying off debt, investing, or cutting unnecessary expenses.
Include essential expenses
These are expenses that you cannot avoid, such as rent, electricity bills, water bills, insurance, and mobile bills. Subtract all these expenses from your total income.
Calculate debt payments
If you have any outstanding debts, such as student loans, property loans, or credit card bills, subtract the amount you pay towards debt from your total income each month.
Plan your expenses
Now is the time to plan your essential expenses based on the money left after subtracting necessary expenses and debt payments. You can plan your dining out, vacations, or other expenses. You can also save the leftover money in the bank or invest it.
Adjust your budget every month
Review your budget every month to understand where you are spending more and where you can cut back on unnecessary expenses. As a result, you can achieve your financial goals sooner.
Personal Budgeting
Creating a budget isn’t just for those with low incomes or those who need to keep track of every penny. The truth is, that almost everyone, regardless of their salary or bank balance, can benefit from making a budget.
Budgeting is an excellent way to organise your financial matters, but some people think it’s not for them. Let’s dispel some common budget myths today that often prevent people from keeping an eye on their expenses and using their money wisely.
7 Myths and Realities Related to Budgeting
Myth 01 - Budgeting Requires Mathematical Expertise
A common myth that discourages people from preparing a budget is the belief that one needs to be a math expert because it involves complex calculations. However, the truth is that budgeting is a simple exercise of addition and subtraction. We have calculators to assist us in this process. Therefore, even without a math background, one can prepare a budget.
Myth 02 - Budgets Stay in the Mind Always
Some people think that there is no need to create a written budget because all major expenses are always on their minds. However, relying solely on mental calculations is not the right approach. A budget should always be clearly defined in written format. This helps in revisiting and recalculating your budget even if you forget about it.
Myth 03 - Budgeting Should Be Delayed
Individuals in their 20s and 30s often believe that budgeting can be delayed because they have their whole lives ahead of them. They think they can do it later since they have plenty of time. But this is not true. Starting as early as possible is beneficial because the sooner you start budgeting, the sooner you will be on the right track, aligning your financial situation with your lifestyle and future goals.
Myth 04 - Always Expect Unexpected Expenses
Many believe that there will always be unexpected expenses, which will disrupt the planned budget. Hence, they consider budgeting a waste of time. However, people forget that budgeting can accommodate unexpected expenses. While there may be some issues with the exact amount, there is always room for improvement.
Myth 05 - Budgeting Is Difficult
Some individuals shy away from budgeting, thinking it requires too much time and effort. They believe that budgeting is a complicated process. However, this is not true. Budgeting simply involves tallying your income sources and expenses. Income is allocated to essentials, leisure, and savings/investments. It is that simple; there are no major calculations involved.
Myth 06 - I am Already Saving, So I Don't Need a Budget
People who are already saving or investing may think they don’t need a budget because they are on the right track. However, a budget is always necessary for controlling expenses and gradually increasing savings. Moreover, a budget helps in channelling savings into financial assets and creating emergency funds.
Myth 07 - I Have No Debt, So I Don't Need a Budget
Those without any debt may feel their financial situation is stable, and they don’t require a budget. However, adopting a habit of saving and investing and exercising discipline in spending always necessitates a budget. A budget serves as a summary of your current financial situation, regardless of whether you have debt.
Conclusion
These were some common myths surrounding budgeting that exist among people. The aim of this information was to dispel these myths and encourage individuals to embrace budgeting, ensuring financial well-being for all households.
