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What do you mean by Budget?
The budget is nothing more than the estimation of revenue and expenses. In this, we just have to determine our monthly revenue and then we have to make an estimate of our expenses from our revenue. It is done for future use on a periodic basis. It is useful for every person, group of individuals, business or for a family too to learn & understand how to make a budget!!
Many people get confused and deny making a budget because they do not know how to make a budget. But it has a quite simple step, but before understanding the step involved in budgeting, let us get little knowledge of its type.
Classification of Budget
There are many diverse types of budgets based on their users, time, capacity, scope, Receipts & Expenditures, etc. They all are incredibly unique in themselves, but the main differential of budgeting is mostly based on users, one for corporate and another for the individual.
Let’s try to get it in a simple way.
According to User: –
A budget based on the user can further be divided into two categories.
- Personal/ Individual Budget
- Corporate/ Business Budget
According to Time: –
A budget that is dedicated to a particular period is known as a budget based on time such as,
- Short-term Budget
- Intermediate Budget
- Long-term Budget
According to Capacity: –
A budget which is based on its capacity of resources are
- Static Budget
- Flexible Budget
According to Scope: –
A budget which is created by seeing its functions, scope or range are known as budget based on scope, they are further dividend in
- Master Budget
- Functional Budget
According to Receipts & Expenditure: –
In this type of budget all the revenues and expenses are covered in it such as
- Capital Expenditures Budget
- Revenue Budget
Steps involved in making a Budget
It is a very tough question for a person who doesn’t know what the basic step is involved in preparing a budget. On another hand, it is a very simple question for those who have a proper idea of the step involved in budgeting.
Let’s get started
STEP 1: Determine your income
The first step is to identify your income every month after deducting tax. But if your income varies from month to month then one is able to use an average of income.
The most important part of determining income is that after calculating all the income we must remember to deduct taxes, social securities, etc.
Your final payment which you are taking in your home is the net income and is the number you should use while creating a budget.
STEP 2: Note down all your fixed & variable expenses
Now, the next step is to make a list of all our expenses that may be fixed or variable. Here, fixed expenses are those expenses that you spend in a fixed amount every month e.g., House rent, School fees, phone bills, EMI, etc.
And variable expenses are those expenses that are variable in nature such as groceries, shopping bills, gifts, etc.
STEP 3: Sum up your fixed as well as variable expenses
Now it’s time to add up all your fixed as well as variable expenses. Then find out the total amount of expenses and subtract your all expenses from net income so, you can be able to get the left part of income if it exists and also you get to know whether you are spending in the right amount or not by seeing the net income is more or less than the total expenses.
STEP 4: Put your all expenses in their proper category
Next thing is that you must put all your expenses in a particular category so that it will be easy to find out in which thing you are spending how much. And also, you can be able to minimize your unnecessary expenses whenever needed.
STEP 5: Decide what to do with your savings
Once you deduct all the expenses from your net income then, the part of income that is left now is your savings. Now you must think about where you want to invest your savings. You may invest it in mutual funds or ETFs, cryptocurrency, stock market or also in gold.
Saving is an especially important part of the income as from saving only we can be able to cover unforeseen future conditions. So, I must suggest you save 5-10% of your net income.
STEP 6: Adjust your habits if needed
Once all things are done then you may prepare a pie-chart where you can simply put all the categories of expenses in the percentage form.
Take your net income as 100% then put the percentage of your expenditure on categories after that summarize it all in a pie-chart and analyze your expenditure habits and adjust it if you find you are spending more than you need in any of the categories.
By looking at the percentage it will be amazingly simple for anyone to get a proper understanding of income as well as expenditure.
STEP 7: Keep checking in
Now you have a blueprint of your budget where every income, as well as expenditure, is mentioned but a particularly important thing is that you must review your budget on a regular basis and be sure that you are staying on track.
You must stick to your budget plan and review it every week. This will help to get track of whether you are spending part of your income in the right manner or not.
Congratulations! Now you have the proper knowledge to prepare a budget.
But if you are still confused then you must go through the sample budget of your choice. That sample budget also may be of your friends or families or if you are in corporate then the budget of another company will help you to get proper knowledge to structure your budget.
Useful tips for good budgeting: –
Make as realistic as possible, always put the real figures, never use window dressing in budgeting. In budgeting, you are allowed to put the part of the income as interment expenses so never show fake figures.
Prioritize your expenses
Most important thing is to prioritize your expenses according to your needs. By prioritizing expenses, you may easily spend your money on those things which are really very important to you.
For e.g. If you have to buy a car and you also have to pay your college fee, then your 1st priority will be to pay the fee of your college then after if you left with enough money then only you may buy a car.
Make a Budget for additional expenses
There is one thing that can easily enter into your budget and ruin everything. It’s nothing other than surprise expenses and for that situation, you may consider adding an extra category in your budget as the name of an emergency fund.
Consider using online tools
You must have to keep an eye on your’s and for that purpose using an online tool to track all your activities of income and expenses is the best choice. While keeping a record with a paper pen perhaps you may put the wrong figure in it but if you use an online tool, it will be a life-long record and there is less chance of making mistakes.
Consider automating your savings
It is best to set up automatic withdrawals from your regular account to your savings account. You may always try to automate your payment of expenses and also you may automate a fixed percentage of your income as a savings in a bank account.
If you left with $10000 every month in your bank account, then fixed up $5000 in your savings account every month. This will help you to control your unnecessary expenses.
Adjust as needed
It is always prepared for the future and on an estimation basis. In order to stick with your budget, you must review your budget every week and modify or adjust it if needed.
As the future is full of uncertainty, sometimes uncommon situations arise in our life such as job loss, weddings, the birth of a baby, etc. And in that situation, you are free to modify or change it.
From all the above-mentioned steps, suggestions to create a good budget by keeping small things in mind & suggestions to analyze sample budgets, It will be very easy for each and everyone to create their own budget.
And in my opinion, every person should definitely make a their own because a it will always help you to reach your financial goals.
Overall budgeting is not any hard work, it is just a guideline to manage your money, savings as well as expenditures.