If budgeting isn’t really as bad as we often make it out to seem, then what does it actually look like? Can it even be a pleasant experience? Before you roll your eyes at the idea of fun and budget worked into the same sentence, take a look at what comprises a budget. Here’s a hint: You’re not meant to follow its directions; it’s meant to suit you—your desires for money and your attitude around wealth.
The Basic Components of Every Kind of Budget
A budget, simply put, is about analyzing money coming in and going out. While there’s no single right way of preparing and using a budget, as we’ll see in the next section; there are basic components to how a budget works.
You have to first take stock of your income, of course, but make sure to monitor all sources of income. We can often forget things like government subsidies or tax credits, but if it’s money you’re going to spend, then it counts as income.
Were it not coming in, could you have bought those extra supplies for your business or gotten the kids those new shoes they all needed? Don’t take any variables for granted, especially at the beginning of drawing up a budgeted game plan.
We often don’t realize just how much we can actually afford or not afford until we’ve got it down on paper. Also, be mindful of your tax bracket. You might want to record your income in its net form, but be wary of your gross income as well because this will factor in at tax time.
Will you have saved enough money throughout the year in order to easily and immediately pay back what you owe, or will you struggle for the rest of the year with a government payment plan?
Likewise, the same diligence should be applied when you receive a tax return from the government. Will you impulsively spend your newfound wealth, or will you intentionally put it toward the goals in your game plan, bringing you that much closer to your freedom?
When calculating accurate projections of your income, it might be a good idea to lean toward downplaying those projections. You want to be prepared and able to meet your expenses and other needs even during your slowest and lowest months of income.
Fixed expenses are usually the easiest to deal with because you can budget them easily into a plan. You know you’ll always have to pay them month after month at the same price. One thing to keep in mind, however, is looking at them again on a yearly basis, because you might have to consider things like inflation, upgrades, or downgrades.
Variable expenses are next, and they’re just a tad bit trickier. They’re figures that don’t change overly much, but you might find yourself ballparking a monthly allowance for them so as to keep up with payments.
Your heating bill, for example, may come every quarter rather than on a monthly basis, and based on your usage in that time, the price will vary from quarter to quarter. That being said, you’d have to calculate your average monthly payments, ideally based on the months in which your usage was the highest.
This way, you can set a small amount aside designated for the heating bill every month, instead of scrambling to find three months’ worth of premiums to pay when the time comes.
For now, it’s enough to know how variable expenses work, and why it’s best to keep them in a separate category to your fixed expenses. Then, you’d want to keep a record of any discretionary expenses. These are basically expenses that are irregular and not essential to the running of your household.
Think of your wants versus your needs—eating out or any recreational activities would be considered discretionary, for example. With all things concerning your expenses’ projections, you might want to do the opposite of what you did with your income.
That is, instead of downplaying your monthly costs, overestimate what they might be in order to give yourself a bit of a cushion in case your costs really do turn out to be higher than expected. The final item every kind of budget should factor in is goals!
Don’t forget those —despite them being final on your list and the least urgent out of all of your budget items, they’re the whole reason for beginning your budget in the first place.
For now, just consider immediate goals you’re currently working with, as well as goals that you’d like to achieve within the next three to five years, and then beyond.
There’s No One Way to Budget
Whether you decide to keep your budget in a notebook, or on a spreadsheet on the Cloud, or you decide to download a budgeting app on your phone or device completely depends on you. Many people use an app due to ease of use, but others use their notebook for the very same reason.
Which one is easiest for you? Furthermore, we usually think of aesthetic reasons for using a budgeting system as having little to no priority, but if something is visually pleasing to you, you might find it easier to open it up, or you’ll simply appreciate it more.
Something that’s too chaotic or complex-looking might dissuade you from sticking to the plan. Looking at your budgeting records should give you a clear overall picture of what’s going on with you financially, but still be concise enough to help you understand the details of your plan.
In other words, if you become stressed just by looking at the budget sheet, then you might want to rethink your display. Make those comprehensive lists and categories keeping in mind that this task is like creating a roadmap or recipe. Where are you trying to go, or what are you trying to make? Also consider what it takes to get to that destination, or to make that recipe. When using a GPS, do you like the audio on or off?
Do you have to keep it high on the dashboard, or simply glance at it every few miles or so? Let’s use the cooking recipe metaphor. Do you have a small kitchen, or is it big? Do you have an array of kitchen appliances and tools to bake and cook with, or are you working with one mixing bowl and a spatula?
Do you see how it’s not simply about having a GPS or a recipe? How you use these tools matters. It’s going to determine efficiency and ease of use, and that will in turn encourage you to use the tools you have thoroughly and consistently. Quality and consistency then determine success.
Therefore, it’s important to take note of what works for you and what doesn’t month after month. If you find you’re struggling with using your budget sheet, consider the fact that you might not be the problem!
The way in which you use your tools could be deterring you from success. In those first few months, take note of what you like about your budget and what you don’t; what helps clarify the bigger picture of your goals and what simply confuses you. Adjust your budget accordingly. The more you align your budget to your habits and behaviors, the more likely you are to enhance the helpful ones and replace the bad ones.
One final note on what goes into a budget is to leave nothing out. You may have already caught that drift, but it bears repeating. Everything needs to show up on your plan in order to make this process as workable as possible. Things that aren’t anticipated usually give your budgeting plan an Achilles’ heel.
Of course, there will always be unexpected expenses or emergencies that require cash, but we already know that life has its ups and downs. As backwards as it may sound, block out time in your schedule and budget for the unexpected.
That is to say, expect to be thrown off course now and then. The goal of a budget isn’t to follow the blueprints perfectly. The goal is to be ready for the unexpected and prepared to go back to the drawing board again and again.