How to make a budget in 10 Easy Steps
This post may contain affiliate links. Please read my disclosure for more info.
Meet Henry. Henry works and earns some money at the end of the month. On the payday, Henry is so elated and feels like he is ready to take on the world. Fast forward to the 15th of the next month, Henry calls his friends to help him with a little change till the next payday. His friends tell him that he needs to make a budget but Henry feels having a budget is for people with more than enough money to spend.
Have you ever met someone like Henry? Or are you, in fact, someone like Henry?
The truth is many of us are like Henry. We might not exactly be like Henry, but we often find ourselves wondering where all of our money has gone at the end of the month. Sometimes it feels like money grew wings and flew away.
As a young adult, it is important that you take control of your finances. Although you might be nowhere near your dream income, it is still important that you know how to manage the money you have right now.
Creating a budget would go a long way in helping you to fulfill your money goals. It could be that you are saving up to buy a gift for a friend, saving for retirement or saving so you can have a getaway in the wonderful city of Bali or Santorini.
All of these goals would be achieved easier with a budget.
What is a Budget?
I am pretty sure you know what a budget is, but just so we are clear, a budget is a summary of intended expenses coupled with expected revenue.
Although many people might consider a budget to be restrictive or rigid, the reverse is the case.
A good budget protects your finances, helps you to be frugal and also allows you to spend on things that really matter.
Why you need to make a budget
The simple answer is a budget would help you to take control of your finances. It limits spending money on things that are not important.
How to make a budget in 10 Easy Steps
Step One: Make the decision to create a Budget
If you have read the article up to this point, then I am pretty sure you want to make your own budget.That’s great.You can tell others around you as well that you want to make and follow a budget. Chances are that they would be supportive in helping you achieve your goal.
Step Two: Choose the best Budgeting method that works for you
For you to have a budget that you can follow, you need to choose a budgeting method that works with your needs. There are some budgeting methods that work best for over-spenders,while some work best for those who just want to keep things simple.
Best Budgeting Methods
Below is a summary of the three most effective budgeting methods that work for personal use. I would advise that you try out different methods to see the one that works best for you. If none of them work then you should check out these other budgeting methods.
Method One: Zero-Based Budgeting Method
In this method of budgeting, you need to account for every Naira that is earned.Say for example, you earn 200,000 Naira in a month but have a monthly expense of 100,000 Naira. Using the zero-based budget system means that you need allocate the remaining 100,000 to something.Are you saving for a new house? Do you want to get a car by the end of the year? Allocate the extra income to these goals.This method works best if you create different categories that you can spend your income on. Make sure that these categories are meaningful and not just guilty pleasures, this way, you can make room for unexpected expenses.
Method Two: 50/30/20 Budgeting Method
This method was made widely popular through Senator Elizabeth Warren’s book “All Your Worth: The Ultimate Lifetime Money Plan.”This method involves that you divide your income into three parts namely Needs, Wants and Savings.Needs are expenses that you cannot do without. These include paying for electricity, rents or repaying debts.Want are all the upgrades that you need to make life more enjoyable. Examples include watching movies at the cinema, buying Coldstone Ice Cream instead of Fanice or opting to buy a Mercedes instead of a Toyota.Savings include investments and money added to emergency funds.You need to be able to clearly distinguish between your wants and needs if this budgeting method is to work. If you are someone that considers ColdStone Ice cream to be a need, then this might not work for you.
Method Three: Envelope System
This method involves cash only.You would need to figure out all the major expenses you need cash for in a month. Group these expenses into different categories and then allocate how much money you intend to spend on each of them.
Also, label an envelope for each category.When you have done that, go to the bank and withdraw the exact amount of money you intend to spend for the month.
Next, put the cash for each category in its respective envelope.This budgeting method helps you to reduce the need for carrying your ATM card around.
Step 3: Figure out how much money you have
This involves pulling up all your account balances. From your savings accounts to your investment accounts.
Note the interest rates on each account and also the cost it takes to run each of the accounts.All of this information would help you know exactly how much capital you have. It would also help you know how much you have to work with.
Step 4: Figure out how much you make
This is different from figuring out how much you have. After figuring how much you have, you need to know how much you make.This varies greatly for different people. Some people earn at the end of the month, some at the end of the week, and yet some on an hourly basis.
To get an estimate of how much you make, take an average of your income over the last 6 months.If your income is really irregular, you can set the lowest income received as the amount you make. This would better prepare you for the worst case scenario.
Step 5: Calculate your debts and recurrent bills
Have you borrowed money recently? Is there a minimum payment you need to make every month? This is where you need to write it down.Take into account all the debts that you owe (Even the ones you think the creditor has forgotten about)
Also calculate all the bills that are required to be paid monthly. This might include Electricity bills, Data Subscriptions, groceries, and all other compulsory expenses you cannot go a month without.Dividing these expenses into categories would make it easier for you to know specific items you are spending on.
Step 6: Write down your Money/Financial Goals
Did you know that people who write down their financial goals have a 80% chance of achieving them? Well now you know.So grab yourself a pen and a paper to write what you would want to achieve with your money.
If you feel more tech-inclined, you can always type the goals on your phone or computer.Remember to be realistic when setting your goals. Let’s face it, you are not going to dethrone Jeff Bezos with your 200,000 Naira paycheck.
Step 7: Use Financial Apps
Step 8: Live within your means
What would be the use of a budget if you do not follow it? Do not be carried away by fancy things you don’t need.It does not matter how much you make if you don’t leave within your means.
Earning more money would not make you miraculously be able to manage money.If you earn 200,000 Naira each month, live a life that does not exceed 200,000 Naira. This way you would be able to spend on things that truly matter.
Step 9: Make Adjustments where necessary
Life comes at you fast. One decision from the government can make you throw all estimated expenses through the window.Items might become pricier. Take note of all these changes and adjust your budget so that it can accommodate these changes.
Step 10: Don’t beat yourself up, Keep Adjusting. Crush your Goals.
Making a budget is the easy part. Following the budget is the hardest. It is easy to give up and get frustrated. You don’t want to be that guy.Failing to follow a budget for the first time does not mean that budgeting is not for you.Try again, and again and again. It is totally worth it.
On a final note
Now is the time to create a budget if you have not done so yet. If you are still doubting the importance of a budget, let’s meet Henry again.
Henry finally sees the importance of making a budget. He chooses the best budgeting method that he thinks would work for him. Although he fails in his first few months of following his budget, he is determined to keep trying.Finally after months of trying, Henry is more conscious of how he spends his money. On the 15th of each month, Henry calls his friends and they go out to grab a couple of drinks (Don’t worry, he is not spending from his retirement plan).
By following the 10 steps listed above, you can create a budget that would be easy for you to follow.
Do you have a budget? What is your biggest challenge when it comes to creating a budget?