We've all been bad at handling our money. Even the best accountants have had moments of bad judgement. Believe me, I've been there (prior to 2019). I used to be one of those people who just received money and spent it, having little to no savings. It wasn't until I started uni when I actually got my sh*t together, financially.
I previously wrote about what you should do to keep your finances in check during an economic recession (I still haven't gotten to translating that article yet, nor will I ever get to it, to be honest). So if you read that in Spanish, you probably know where today's advice is coming from. But if you didn't, no worries, I got you boo!
I'm not going to lie, I had to do a bit go Googling to write this post. It's not that I was having trouble thinking of the content, I had that very much in mind. The thing is I was experiencing writer's block, and I had to get out of my funk. Don't judge me, ok? You gotta do what you gotta do...
What is a budget?
A budget is a document in which a person or a business lists all of their income sources and the expenses income is destined to cover. It is drafted before-the-fact, that is, before you even receive income or hand out cash to cover expenses. A budget's key objective is to help you plan ahead.
How does one undertake the task of budgeting?
There are a few steps to budgeting, the first and most crucial one is to list every single source of income you have or may have during the set period. It is important to know your income sources and their amounts or estimates in order for you to plan ahead: your total income is your expense limit.
I would recommend you budget an entire year. Yearly budgets are not set in stone, so you can adjust accordingly. In budgeting an entire year in advance, you are able to take into account seasonal income and expenses. For example, in December you may get a Christmas bonus, as well as having to buy gifts for everyone during the holidays; in July, you might be traveling on vacation; your birthday is in September and you'll be out celebrating a lot. These are seasonal incidences that you need to keep in mind when budgeting, as you may have to plan saving money in between peak expense seasons, or when your income is higher.
When listing your income and expenses, classify them in fixed and variable income. This will help you identify income sources that you may need to maximize (i.e. you have a side-hustle where you work for tips, you provide freelance services in your spare time), and expenses that you may need to minimize or cut all together. In variable expenses subject to budget cuts, I would list things like daily trips to the coffee shop (of which I am guilty), eating out, and impulse purchases.
Now that you have identified all of your income and expenses, and even indulged in a few expense cuts, it's time to set everything in motion. You are now ready to project your first planning period, without all of the expenses you cut. Cutting expenses you had doesn't mean you get to allocate that cash overflow to existing expenses, it means you get to set that aside to start saving!
You should always set aside part of your income for a rainy day. There is no exact percentage, dollar amount or formula to determine what is right for any person, it's a personal matter. Budgeting helps you determine what amount to set aside is right for you. And you should always include a "unexpected" expense category in your budget, just so you can be covered for any surprises.
I've budgeted, now what?
Well, this is quite obvious. Now you need to track your income and expenses as you go. At the end of your planning period, you must contrast the budget against real numbers (i.e. the income and expenses you actually had during that time frame).
This will help you see whether you succeeded in sticking to your plan or whether there is room for improvement. If you stuck to plan and you have leftover cash, put it in your piggy bank. However, if you exceeded your income sources, you must go back to the drawing board and adjust for periods to come.
So... How does budgeting help me get my sh*t together?
Here's the thing, it's all about being organized. If you're organized, then budgeting will come naturally to you. If you struggle to be organized, then you might have to work on a lot of things in tandem.
Budgeting is a way to get your life together. They say money isn't that essential to human life, but on the contrary, it is. Money is what keeps everyone alive: it is a universal token for receiving goods and services. Keeping track of your money and optimizing it will help you elevate your lifestyle. In keeping your financial affairs in order, you may achieve balance in other aspects of your life as this will be one problem you won't have to worry about actively.
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