You wouldn’t set out traveling without a map, would you? That same mentality applies to your financial journey. No matter what you goals are, from financial stability to financial independence to covering the cost of school for your children to a once-in-a-lifetime vacation next summer, you can’t get there without a clear sense of the path ahead, and a good ability to follow the directions you lay out for yourself.
No matter what story your finances are currently telling you, a good budget can help get you where you want to go. If you’re ready to sit down and draw a map for your financial future, you’re in the right place. Here are the basic steps you can follow to make a budget that works for you.
Know What You Have
First things first: you can’t make any informed decisions about your money without knowing how much you have. Make sure you know how much income you have each month. Add up all sources of money. If you have a variable income, take the average of the last 12 months and use that as a baseline or, if you want to be extremely safe, you can also use the lowest month of income from the last year as your assumed monthly earnings.
Follow the Money
Now you need to know where that money is going. Spend a month tracking all of your expenses. Save all of your receipts and bills, and make a note of any automatic payments like a mortgage payment. Then, separate all of your expenses into categories. You can keep it general, like “Food” and “Household,” or get an even better idea of how you spend with more specific categories like “Groceries,” “Restaurants,” and “Electric Bill.” At the end of this exercise, you should have a clear picture of how you tend to spend your money and exactly how much of your paycheck goes to fund each area of your life. Online resources like Mint.com and You Need a Budget can help with this.
The Bottom Line
Take your income and subtract your monthly expenses and any debts. This number is the bottom line, or your current financial worth. If that number is currently negative, the goal of your budget will be to bring it to zero and, eventually, a positive number. If you already have a positive number, your budget will help you to grow that number in order to create a safety net or reach a specific financial goal.
Take a Critical Look
Really scrutinize your expenses and be honest with yourself. Some expenses are non-negotiable, like basic groceries and housing. Chances are, however, you will see plenty of places where you can cut back a little. Set realistic limits on each category of expense. One important rule, however, is to leave yourself some space for fun! Yes, you want to cut back and save money, but if you are too harsh with yourself you will never manage to stick to the budget. So be careful with your money, but save room in the budget to treat yourself to the things you like most every once in awhile.
Now that you have a little extra money in your budget, start putting aside about 10% of your income into savings towards retirement, an emergency fund, or your next financial goal. And remember, goals can be fun, too! SALAAM African Bank can help you set up savings accounts and manage your money carefully to reach your goals.