Top 5 Questions about Budgeting
Understanding Budgeting and How to Create a Budget
Many people consider budgeting a process that is practiced only during hard times. It brings about thoughts of struggling businesses, job loss, or a hurting economy. It is considered to be an unpleasant practice that involves stretching every penny and struggling to cut away any excess costs. However, the practice is a great deal broader than that. In fact, it is the foundation of any solid financial plan for businesses and individuals alike. Regardless of the financial situation, understanding the budgeting process and knowing how to properly create a budget that will work for you will help you to keep track of your money with greater precision and ensure that it is being used to its fullest.
What does budgeting really mean?
Budgeting is simply the process of creating a plan that allows you to break down you income and your expenditures to use money more wisely. Without tracking the money that is coming in and going out, neither a business nor an individual can hope to achieve its full financial potential. If you do not have a solid grasp of how much money you have and how you are spending it, then any hopes to succeed will come with a notable struggle.
That said, many people still balk in the face of budgeting, in the fear that they will need to suddenly begin slashing all of the spending that they have been enjoying, especially the smaller, more frivolous items to which they have become accustomed. The truth is that budgeting doesn’t require any cuts to be made at all. Instead, it provides a more thorough layout of where spending has occurred, so that you can make any spending cuts that you deem necessary, based on the numbers that you see.
How does budgeting track income?
The very first step to budgeting is tallying up your income. Generally, this is one of the more basic elements of the process and is one of the easiest to accomplish. This is because the income likely comes from far fewer sources than the number of areas in which expenditures are made. Don’t forget that income doesn’t just refer to the largest source, but also includes any smaller arrangements, including side businesses, interest, etc.
How does budgeting track expenses?
Once you understand how much money you have to work with – that is, your income – you can start to look at the various expenses that occur throughout the month. Begin with the more obvious elements; those that are fixed and regular such as rent or mortgage, vehicle payments, debt, insurance, and taxes. These are the payments that are made every month and that rarely fluctuate, or do so very little.
Once those expenses have been tallied, the more challenging – and yet still readily achievable – element comes into play. Where is the rest of your money spent every month? Use bank account and credit card statements, as well as receipts you’ve saved, to help guide you with this step. Take note of how much is spent on utilities, services, food, and in other areas.
How does budgeting use these numbers?
Once you have an understanding of your income and your expenses, you are ready to begin budgeting. The first step is to add up all of your incomes and all of your expenses. Subtract your expenses from your income and have a look at that number. If it is a positive number, then you are earning more than you spend in a typical month. If you have a negative number, then you are spending more than you earn.
If the number is negative, don’t panic. Consider it the reality check that you needed to be able to address some spending issues and remedy them to reverse this deficiency. You have already done an important part of the work and know just how much needs to be changed in order to break even or to come out ahead.
How are adjustments made with budgeting?
With your general understanding of your financial situation, whether you came out positive or negative, you can now begin making budgeting adjustments to maintain some control over your expenditures and keep those numbers moving up.
Have a look at the various expenses that you have tallied up. If your expenses are higher than your income, determine where changes can be made in order to lower the amount that you need to spend every month. Areas such as rent and insurance are generally set in stone, unless you plan to move or change insurance companies. However, other expenses – such as coffees from a specialty café instead of brewed from a machine at home or at work – present some opportunities for adjustments.
Of course, keep in mind that as important as budgeting is, it is only the tally of the numbers. The key element to making it work is to actually use the plan and stick to it.