Financial Advice 5: Budgeting Basics

in steemleo •  last year 

Build a Budget and Follow it!

The first step to being a master of your finances on the path to reaching your goals starts with creating a budget. Budgeting is easier said than done, much like exercise and a healthy diet, having the right idea isn't enough, you have to practice what you preach. Once you have a workable budget, you can start saving for your financial future. The more closely you follow the budget, the sooner you should be able to reach your dreams.

A Budget Doesn't Balance Itself


People, businesses and especially governments all have difficulties balancing a budget. The fundamentals are basic: income should be greater than or equal to expenses. If you spend more money than you receive, you will eventually go broke! Your budget should allow you to save for the future and if you are already retired you should have a plan to make your money last-running out of money in your golden years is the culmination of bad budgeting. Bankruptcy is even worse, it represents the ultimate failure in planning.

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Budgeting 101


Start budgeting by adding up your monthly after-tax income, if you get paid bi-weekly either adjust it by 26/12 or make 12 monthly budgets if your income is not the same month to month. Only count income that is assured, relying on excessive commissions, bonuses or lottery winnings increases the likelihood of failure. If your income is variable, use a conservative estimate such as the average monthly amount over the past two years. It's better to underestimate than to overestimate your income, a budget is personal and you shouldn't show it off.

Once you know your monthly income add up your fixed costs such as rent/mortgage, debt payments, insurance, utilities, and anything else that you have no short-term discretion over. If you subtract your fixed costs from your income you will have your discretionary or variable costs. Some variable costs such as food, personal items, transportation, and clothing are not optional but you do have control over how much you spend. We will talk about that later, for now just set a reasonable limit for your variable costs. Make room for entertainment, you only live once.

Savings and Miscellaneous Items


Once you have your essential expenditures down (shelter, food, clothing, entertainment, transportation), you need to have room left over for Other Expenses and most importantly Savings. Long-Term and Short/Medium-Term Savings should both be included. Saving for your retirement is not optional, saving for short-term things such as a vacation, a car, or another large expense is also important as you probably can't afford these items in your monthly budget. Miscellaneous items can include things you don't need to buy every month like small appliances, gifts, membership fees or cryptocurrency speculation.

Update Your Budget


Keeping a spreadsheet and updating it regularly helps you realize where you are spending too much money so you can save more. After a few months or years, you should be able to accurately predict your budget, save and have money left over to do with as you please. Whenever you have extra money at the end of the month (or year if you are more disciplined), reward yourself by spending half of it and save the rest. The same thing goes if you get a windfall like a raise or inheritance and remember to adjust your budget annually for inflation.

Tips and Tricks

  • Think of the benefits from following a budget, not the pain. Do you want to buy a boat, travel or retire early?
  • There are budgeting apps and spreadsheets available online that make it easier, sometimes your bank may have an App that can help.
  • If you can't make sense of your budget show it to your financial advisor, accountant or someone you trust who seems to be in control of their finances.
  • Never use before-tax income, tax is the least discretionary expense you have.
  • Move your extra cash to an emergency fund, out of sight out of mind. Having a large balance in your chequing account can be tempting to spend so only leave what you need for the month in there.
  • Avoid using credit cards if you cannot pay the balance off every month. There is literally no excuse for this bad habit, credit card debt is very rarely worth it.

Good Luck


If you aren't yet on a budget, I strongly recommend you start one now. You cannot build a financial plan if you don't have a budget and you probably won't be able to build your net-worth or retire if you spend more than you earn. By not budgeting you are only hurting yourself. Even if you are a student you should build a budget, the sooner you are in control of your finances, the faster you will achieve financial freedom.

Thank you for reading, your comments and questions are appreciated.

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I never tried to make a budget list or saved anything. I think I should have to start because this is the only way that I can get survive for the long term.

Good Write-up

The best time to start is now. Every month you delay will make it slightly more difficult to get on track. Hope you actually benefit from this information. The happiness I'd get from helping even one more person meet their goals is more important than all the Leo on the blockchain.

Dear @financialadvice

Interesting choice of topic. Upvote on the way :)

I just discovered your profile a moment ago and I found this publication really worth reading. Budgeting is a must and I'm trying to teach my wife how to handle it. Ain't easy task I tell you.

ps. i realized that telling someone "I've no money" doesn't sound good. But saying "my budget is limited" sound so much better :)

If you spend more money than you receive, you will eventually go broke!

Excelt of banks and goverments, which can create more debt, print more money and carry on with their over-spending.

Yours,
Piotr

Thank you for reading this Piotr. The words we use to portray ourselves definetely make an impact upon others perceptions.

Funny thing you bring up governments and banks being able to do as the please, such is not the case in the long run. Printing money leads to hyperinflation and a destroyed economy. So does overspending. Governments can run small perpetual deficits because they have more control over inflation than individuals and they have the power to raise taxes. They should still have some restraint. I believe you're from Venezuela so you have seen the effects of poor monetary and fiscal policy first hand.

Best of Luck

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