So, it’s the end of the month and you just got your pay check. You are excited, finally you have some money in the bank. That feeling lasts for five minutes then you realize that you have to pay your rent, you need to fix your car, you have to hang out with your friends and just like that you are broke.
This is a common issue with a lot of us, the inability to balance our expenses with our income. Let’s think about a balancing scale with our income on the left and our expenses on the right. The goal is to ensure that the scale balances out or our income outweighs our expenses. In order to do this, we have to ensure we budget effectively.
WHAT IS A BUDGET?
In its simplest form, a budget is an estimate of your income and expenses over a period of time. Budgets are meant to be re-evaluated and adjusted until you get a final version that works for you.
HOW DOES BUDGETING WORK?
Having a written budget allows you to keep track of what you should be spending your money on. It might not sound like the most fun thing to do but it is a practical way of ensuring that you don’t get stuck living from pay cheque to pay cheque. Now let’s figure out how to budget.
The first step is to figure out what your monthly income is. If you get a regular pay cheque, you have to use the net income as taxes would have been deducted from your gross income. However, if you are self-employed, your income is not fixed, you have to make your budget based on your expected income for that month. After doing this, the next step is to create a list of your monthly expense. This will enable you determine how you spend your money monthly. This the foundation of your budget. You need to separate your expenses into fixed and variable expenses. Your fixed expenses include your transportation cost, your rent, your data cost and so on. These are unavoidable cost and cannot be forgone. They are recurring costs in your budget. Then you have your variable cost which are cost that can be avoided. These costs include cost of movie tickets, drinks with friends and so on. Some of your variable expenses can be forgone in order to ensure that your budget works for you. Remember, the goal is to ensure that your income outweighs your expenses on the scale we spoke about earlier.
The final step is to sum up your expenses, compare it with your income and keep making adjustments to your variable expense until you are able to achieve your goal.
This is an introduction to the art of budgeting, in the coming weeks we will expand on the knowledge gained from this article and talk about more practical steps we can take in our everyday life to ensure that we are financially free.
Thank you for reading and stay tuned.