Creating a Budget That Works For You and Your Lifestyle
Realistically, when it comes to creating a budget, it can often be a big hassle. Not only is it time-consuming, but it can also be difficult to determine how much money to use for each specific group of items and for what period of time (daily, weekly, monthly, or yearly). However, with technological advancements, it has become significantly easier to make a budget, using digital platforms to do all the calculations for you.
Yet, even with these online programs, you’ll still need to understand the basics in order to build an efficient budget that works for you and your lifestyle. It’s crucial to prioritize your current liabilities and expenses and produce an actual financial plan, in order to reach your financial goals. The objective here is to create a budget that offers a concrete basis for financial success.
Fact: The 5 largest and often most important expenses for the average consumer are housing, food, transportation, insurance, and healthcare.
The Main Elements of a Budget
A typical budget usually includes the following:
- All fixed expenses
- All flexible expenses
- All discretionary expenses
Your income, including all the money coming, is heavily used when building your budget. This involves wages from jobs, alimony or child support, other benefits, and court settlement payouts.
Expenses are separated into three categories, depending on their form of payment and if it’s considered a “want” or a “need.”
- Fixed expenses are needs that have a fixed cost and remains constant each month
- Flexible expenses are additionally needs, but without a fixed monthly cost
- Discretionary expenses are your personal wants
Thus, what is the purpose of describing your expenses? It is simply done in order to help you prioritize and design your budget successfully. It also makes your life much easier when you need to update and reduce your budget because of unpaid debts or changes in your priorities.
Types of Expenses vs. Budget Categories
It’s important to remember the difference between different “types of expenses” and the different budget “categories” that you will assign to your transactions. The expense types are broader and vaguer than transaction categories, which are much more specific. Both are needed and must be defined properly in order to generate an effective budget.
Here’s an example to illustrate this subject more clearly. Imagine your budget is an office building, and the “types of expenses” would be comparable to the floors of the building, and the “transaction categories” would be considered the rooms. Thus, just like there’s a meeting room on each floor, the costs associated with running your home (for example) can be divided between all three expenses (or all three floors).
- Fixed expenses: mortgage payments, HOA, and insurance
- Flexible expenses: electric bills, water bills, and other utilities
- Discretionary expenses: renovation and decorating expenses, as there isn’t an immediate requirement to have them done.
Most online budgeting programs will help you organize your transactions, however, it’s your responsibility to describe your expenses. This way, you know how to plan for the future and how much to cut out when trying to minimize your budget.
Categorizing Your Transactions
Once you begin using an online budgeting program, you will be asked to classify your expenses. These programs learn and understand what the user’s wants and needs are. So it’s required to input your spending categories and budgetary constraints, in order to set and help reach your goals.
Every single one of us allocates funds and transactions differently, depending on your spending habits and lifestyle. While some may group all their educational expenses into one big category, others may divide it into subcategories such as tuition and textbook costs. The more categories you have, the easier it is to track your spending.
Our specialists advise that you organize your transactions in a way that helps divide your expenses. For instance, when purchasing a home, your mortgage payments should be a category, utility expenses should be its own category, and so should home renovations. This way, you know where and how much to eliminate if you’re required to reduce the overall cost.
Estimating Cost of Flexible or Discretionary Expenses
Your fixed costs are the only expenses that are stable and unchanging every single month.
But then, how do you set the monthly costs for the other two types of expenses (flexible and discretionary)? You use the latest three-month average.
We suggest reviewing the previous three months of transactions and finding a separate average for each category. Doing so will help you decide what your monthly spending limit should be for each category. Setting these monetary monthly restrictions is absolutely vital in order to ensure you don’t overspend.
On a positive note, most online programs or budgeting apps do all the complicated, mathematical calculations for you, including your monthly spending limit. All you have to do is categorize your transactions and whatever platform you’re using will tracks how much you’ve been spending.
Reviewing Your Budget and Making Changes
After creating your budget and living with it for a few weeks, we recommend that you review and make and changes that you feel might help improve it. Here are a few points you may want to consider when reviewing your budget:
- Beware of your spending limitations and your actual spending. If it’s been less than two weeks and you’re very close to your monthly limit (in any specific category), spend less and be careful not to go over.
- If you’re having a hard time respecting and staying within your budget restrictions (within any category), adjusting the limits may be necessary. When doing so, keep in mind that your overall expenses must be less than your income. Thus, increasing spending in one category may require you to decrease spending in another category.
- Saving money each month should be considered an expense. Even better if you treat it as a fixed expense and you pay yourself regularly every single month.
Budgets can be a bit intimidating if you have no idea where to start, but they don’t need to be. It’s your money and your life, figure what it going to work for you and committing to a budget will be a lot easier than you think.