Why and How to do Budgeting: Mistakes to Avoid

Budgeting is a habit and not a choice. Yes, budgeting is the basic step in every financial planning. You can plan a good financial future without a realistic budget.

There is no choice. Without a budget, how will you know where your money is going and how can you control your expenses?

So, even if you don’t like the idea, start planning one today itself. Gradually it’ll become a habit.

Why do budgeting

To motivate you to plan a budget, here are a few more advantages.

Helps you know your financial situation better

You can realize your financial situation in a much better way when you start planning a budget. You may think that your income is sufficient and you don’t spend much, so you’ll have a good financial future. But, you may not be paying heed to an emergency fund that can make you lose your financial footing. A budget can make you realize that you’re more or less living paycheck to paycheck.

You can realize your goals

A budget helps you to prioritize where you’d like to spend. So, you can plan your short and long term goals with the help of a budget. It can be paying back your high-interest credit card debts or payday loans or building a good emergency fund. A budget helps you to track whether or not you’re attaining your goals.

Makes your financial life stress free

You always panic when you don’t have a clear idea about your financial life. Also, you may avoid budget since it puts restrictions on how you spend. However, a budget helps in both cases. It is up to you how much amount you want to allocate in each category. It is your decision and you can spend on ‘wants’ as long as you can meet your necessities.

Help you save a decent amount every month

Once you plan a realistic budget and follow it, you get into the habit of saving money. Through a budget, you can automatically put money into your chosen savings accounts. So, you save money and build a better financial future.

How to do budgeting

There are a few budgeting techniques. The most common is the traditional budgeting strategy where you plan your expenses according to categories with the intention of saving a decent amount every month.

You can also try envelope budgeting where you put money into designated envelopes. You are allowed to spend from the right envelope only.

The 50-30-20 budgeting strategy also helps to attain your needs as well as wants. You keep 50% of your take-home to meet necessities, 20% for savings, and 30% for your wants. This is the basic thing. You can alter a bit as per your preferences.

You can alter your budgeting strategies from time to time and make it a fun thing, which you’ll enjoy.

Characteristics of a realistic and successful budget

Is it enough that you’re able to save some amount every month? How will you know that you’ve planned a successful budget? Check out how you can be sure that your budget is ok. This is how you should do budgeting.

You have enough and accurate spending categories

It will be difficult if you don’t have enough sending categories. It needs to be accurate too. When you break your larger expenses categories into smaller ones, it helps to plan and follow your budget. This also helps you to control your overspending.

You have provision for occasional expenses

Most of us often forget about annual expenses; but, a budget helps you to include that in your monthly budget. What you can do is divide your annual expenses by 12 and include it in your monthly budget. Doing so, you don’t become burdened with debt in one month.

You are able to attain your financial goals

Yes, a budget helps you to attain your financial goals. You can break your goals into achievable shorter ones and check whether or not you’re able to attain it. When you can do is, you know that you’ve planned a good budget. When you want to buy a house, you can include a certain amount every month and save it for the down payment on your home.

You review your budget and modify it as per need

The characteristics of a good budget are that you need to review it and make changes to it from time to time. Even if you are able to plan the most realistic budget, it needs to be modified with changes in your life stages.

Budgeting mistakes you should avoid

It is quite important to avoid these mistakes while planning a budget. Otherwise, your planning may not be successful.

Not taking into account sudden expenses

You never know when you may have to shell out dollars for an emergency car repair. Or, there may be a sudden medical expense. These expenses will make your budget fail especially if you don’t have an emergency fund. So, keep room for unexpected expenses so as to make your budget successful.

Not paying heed to smaller expenses

You need to take into account every cent when you do budgeting. You might miss the coffee that you purchase most of the day while going to the office. It may be around $3; but, calculate how much it becomes when you multiply the amount by, say, 20.

Every cent counts especially when you’re trying to repay your debts like high-interest credit card debts or trying to get rid of payday loans.

So, you can understand how important a budget is. Can it ever become a choice? It is a prerequisite. Therefore, make a budget for your friend and work towards a superb financial future.