Budgeting is essential for an effective financial plan; it is the reason every single dollar you spend counts.
With budgeting, you wouldn’t have to worry about not being able to account for your spending; rather, you’d be able to save more and do more with your money.
Budgeting successfully helps you to spend your money smartly, get you out of debt, and helps you to build your savings faster.
If you’re yet to start budgeting, or you’re a pro at it, you will find these 9 practical budgeting tips quite helpful in making money management easy for you.
9 Practical Budgeting Tips for Easy Money Management
1. Track Your Income and Expenditure
Keeping a record of your income and expenditure helps you to know where every dollar you earn ends up.
It is ideal to track your income and expenditure over a three-month period, stating every source of income including cash gifts.
For easy tracking of your expenditure, break down your expenses into four categories: Food, shelter (own or rented home), utilities (gas, water, electricity, phone, internet bills, etc), and transport (transport costs, gas, car repair, etc.).
A spreadsheet app like Excel or Numbers will be ideal for tracking the flow of income and expenses made.
However, you can make use of budgeting apps like Goodbudget, Pocket Guard, Empower, Honeydue, and a whole lot.
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2. Set Clear Financial Goals
Set clear financial goals grouped in two categories: short and long-term goals.
Short term financial goals are goals achievable within a few weeks to 5 years, while long-term goals takes many years to achieve, usually within 5-30 years.
Examples of short-term goals include:
- Saving three to six months expenses as emergency fund
- Paying off small debts
- Saving for a new phone or gadget
- Saving for a down payment for your home
- Saving for a down payment for a car
- Saving for a vacation
Examples of long-term goals include:
- Building a retirement fund: aiming to save up to a million dollars in retirement fund before clocking 65 years.
- Completing your mortgage payment for your home within 15-30 years
- Saving up children’s tuition upto $150,000 by the time they turn 18
- Saving to start your own business within 5-10 years
- Achieving financial independence within 5-10 years
- Paying off all debts including students loan, credit cards and mortgages within 5-10 years
- Growing a diversified investment portfolio for 20 years or more
- Building your networth to over a million dollar within 10-20 years
- Making real estate investments within 5-10 years
You should make your financial goals SMART i.e. they must be specific (stating clearly the reason for saving), Measurable (you must be able to track your progress and measure your achievement), Achievable (Your goals must be realistically achievable), Relevant ( your goal should align with your overall objectives, giving your goal meaning and reflecting your true priorities), and Time bound (setting a time frame within which you want to achieve your goals).
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3. Choose the Right Budgeting Plan for You
There are three common ways of planning your money after tax; but for beginners, I will advise you stick with the 50/30/20 rule.
- 50/30/20 rule:
The 50/30/20 rule divides your budget into three categories: Needs, wants, and savings and debt repayment.
50% of your salary is budgeted for essential needs like housing, utilities payment, transportation, child care, insurance, pet, and other major needs.
30% of your salary funds your lifestyle e.g. entertainment (streaming subscriptions), gym membership, newsletter subscription, etc.
20% of your income allotted to savings, debt payment, emergency fund, investment, etc.
- Zero-based budgeting:
A zero-based budgeting ensures that your expenditure does not exceed your income. A total of your expenditure subtracted from income total (after tax) should equal zero.
As peculiar with all budget types, this type of budget should also include short and long-term savings and necessary expenses.
Any surplus (unbudgeted money) should go to savings. However, if your expenditure exceeds your savings (budget deficit), then you should cut out some expenses to bring your budget to a zero balance.
- Envelope budgeting
This method of budgeting is cash-based. After creating categories for your expenditure, the money for each category goes into a labeled envelope, for example, the amount of money earmarked for groceries goes into the envelope labeled groceries.
You spend from this envelope whenever you go shopping for groceries. However, you stop spending after exhausting the available cash in the ‘groceries’ envelope.
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4. Give Priority to Your Needs
Needs are essential without which it will be difficult to exist. Food, rent/mortgage payment, utilities (electricity, gas, water, phone bills), are essential needs that should be at the top of your budgeting.
Vacations, streaming service subscriptions, eating out, gadgets should come last on your budget list since they are not essential to your survival.
5. Make Savings Effortless With Automation
Building consistency with savings, bills, debt payment, investment, and working towards achieving other financial goals start with financial automation.
By setting up automatic transfers from your checking to your savings and other destinations, you build consistency in savings, take away the need to manage financial tasks manually, eliminate the urge to spend before saving, and ensure timely fulfillment of your financial obligations.
When you automate your savings and payments, you avoid late fees and interest charges on debts, save yourself time and energy, work smartly and seamlessly, prevent overdraft and missed payments, and improve your credit score.
When automating payments, ensure that you have a buffer of $500 or less in your checking account should there be delays, slight variations in bill payment, or unexpected fees.
Also, do not forget to make appropriate changes should you experience a change in your income level; always update your payment details if you’re changing banks and other banking information, and always monitor your accounts regularly.
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6. Review and Adjust Your Budget Regularly
Change in income levels, rising costs of products and services, and variation in needs and wants are reasons a budget should never be static, but regularly reviewing it to reflect your present needs and wants.
An increase in income means more room for your budget to increase your expenditure, while a decrease in income means you having to cut down on your ‘wants’ to make room for ‘needs.’
If you’re new to budgeting, you should review your budget monthly for six months, after which review can be made quarterly.
7. Cut out Unnecessary Spending
You may not have to worry about cutting out unnecessary spending if you’re earning enough income to accommodate all your expenditure. Until then, you should minimize unnecessary spending to free up more funds for actualizing your financial goals.
Unnecessary spending include eating out, paying unneeded subscriptions, buying luxury items, impulse shopping, hidden charges, membership dues, and entertainment.
Cutting out unnecessary spending boosts your savings and investment portfolio, takes away financial worries, speed up debt repayment, and helps you to be financially disciplined.
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8. Take Advantage of Discounts and Coupons
Taking advantage of discounts and coupons can help you lower your monthly spending on groceries, household items, gadgets, and other expenditures.
Hence, it creates room in your budget to increase your savings and investments.
To make the most out of discounts and coupons, you should save on everyday purchases since discounts and coupons add up, buy in bulk on regularly used items, plan your shopping during discount sales, use seasonal sales and holiday deals, and use cash back programs.
However, it is important to avoid buying unnecessary items, watch out for limited time offers and expiration dates, and compare prices across stores for lower prices.
9. By All Means, Avoid Getting Into Debt
Research by Royal College of Psychiatrists shows that one in every two adults in debt, has a mental health issue.
You’re more likely to experience anxiety, depression, insomnia, and stress when you’re in debt. Therefore, to keep yourself physically and mentally fit, you should avoid getting into debt.
Here are ways of avoiding debt:
- Have a budget and stick to it
- Live within your means; ensure that your expenditure does not exceed your income
- Avoid payday loan, credit card loan and other high-interest loans,
- build an emergency fund,
- Be consistent with debt repayment
Conclusion
Budgeting is not about limiting your spending, but spending wisely to avoid pitfalls like debt, financial stress, and mismanagement.
These nine practical budgeting tips will help you to manage and align your finances with your lifestyle, and set you on the path to financial freedom.
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