A budget is mandatory when you want to ensure you are earning more than you spend. When the balance between the two tips on the expense side, then you are in trouble. Budgeting helps you to eliminate the risk of having higher expenses than your income. This is why if you do not have a budget yet then it is time to set up a budget.
How to set up a budget if you have a regular income
Step 1: What do your bills and receipts consist of?
You need to have complete information about everything regarding your financial situation. That is, you need to have the documents related to your finances. Do you have any bank statements with you? Have you kept all of your utility bills together? Do you keep your shopping receipts? You need to keep together everything that you have for the best budget analysis. This will make it easier for the next steps when you set up a budget.
Step 2: How much do you get paid?
You need to compute how much you get paid. For example, what are your regular payments on a monthly basis? You can write down the net income that you directly receive from your employer. You can write your other sources of income if you have any. For example, if someone is living on rent in a house that you own and you get the rent, then you need to write that down as well.
Step 3: What are your fixed expenses?
When you set up a budget, you need to think of all your fixed expenses. Fixed expenses are those expenses which remain the same every month. These can vary slightly, but you can easily predict the range of how much they will be. For example, your credit card payments and your Internet service payment fall under this category. You need to record all of your monthly fixed expenses and compute the total of your fixed expenses.
Step 4: What are your variable expenses?
Variable expenses are things that you are required to spend on, but you can never accurately predict how much they will be. For example, when you go out shopping, you don’t know what you are going to buy. When you go out with friends, you cannot predict how much you will end up spending. These are all variable expenses. You need to record how much you roughly spend on variable expenses on a monthly basis.
Step 5: What is your total income and expenses?
You need to compute how much you earn in total every month. Then you need to compute the expenses. To do this, you should add up the variable and fixed expenses. When you set up a budget, you need to aim for the income and expenses to be equal. If your income is more than your expenses, then you can do something with the extra money. However, if your expenses are more than your income, then you need to make changes.
Step 6: What are the changes you can make to solve the disparity?
When you have your expenses that are more than your income, then you need to start making changes instantly. One way to do this is to look at your variable expenses and see what you can avoid spending on. Otherwise, you can choose to spend lesser on particular variable expenses. If you do it and the expenses are still higher, then you need to do something about the fixed expenses. You can start earning extra income.
Step 7: What to do if you have earned more than spent?
When your income is more than your expenses, you can use the money to put into your savings. For example, you can start saving for your retirement. Please don’t spend all of the money that you earn so that you can keep it aside for emergency as well. You should have some savings and ensure that all of your money is not spent by the end of the month. Otherwise, you will not have any savings, and you will be forced to use your credit card.
Step 8: How often should you review?
Since the steps to set up a budget is on a monthly basis, it is a good idea to review on a regular basis. You should ideally review every month so that you can see if you are spending according to your budget or not. If there is anything that needs to be done, then you can do that. If you do not review your budget situation regularly, then it is easy to go off balance and spend more than your budget.
How to set up a budget if you are a freelancer
Step 1: How much did you make in the past?
You need to have an estimate of how much you earn. To do this as a freelancer, you need to know how much you earned in the past. You can get an average of how much you earned on a monthly basis to set up a budget. The reason for this is so that you know how much you earn per year and per month as this will ease the process of setting up a budget that works for you.
Step 2: Where do you spend?
What are your expenses? What are your variable expenses? What are your fixed expenses? You need to write down where you spend your money every month and how much you spend on the different categories. This will give you an idea about what your expenses are when compared to your income. You need to know your expenditure otherwise you won’t be able to set up your budget.
Step 3: What is the least amount you earned?
When you set up a budget for irregular pay, you need to know the least amount of money that you ever earned. Your budget is going to be based on the lowest income you ever received as a freelancer or as a self-employed individual. The reason for this is that you get a margin to save and this will encourage you to monitor your expenditure on a monthly basis. This is why you need to keep your budget as the least amount of money.
Step 4: How can you plan your budget?
Since you are going to base your entire budget on the least amount of money that you receive, you are going to have extra money at the end of each month. This is assuming that you get the money on time every single time. You need to plan how you intend to save the excess money. To make this easier, you can think of your goals and your priorities so that you can save.
Step 5: Why should you save?
When you set up a budget while you are getting irregular payments, you should save. This will ensure that you can take care of yourself even if your employer does not pay on time. Moreover, if you choose to change your job, then you can use these savings. Moreover, it is always good to have some savings in case of an emergency, and this is one way in which you can save in case anything happens out of the blue.
Start to set up a budget and be the master of your finances today!