by Phil Bradford
How do you feel when you hear the word ‘budget’? Are you making that face saying “Oh no! Again that stressful thing!” But, a budget helps you lead a stress-free life as you can manage your finances almost effortlessly.
If you always postpone your dates to plan the perfect budget that will work for you, stop! There is no such thing as the perfect budget and it’s almost impossible to plan one in the first go.
Practicing will make you perfect in planning a realistic and effective budget for a stress-free life.
Why most budget plans are not successful
One of the primary reasons why most people fail to plan a budget is that they don’t believe in the entire process and rarely know how a proper plan can improve their financial position.
Most people feel that they earn too low to budget their income or they can manage their finances without a budget.
Therefore, first of all, you need to have a clear idea about why you are planning a realistic budget.
Prep for planning an effective budget for a stress-free life
Before you sit down to plan a budget, do these things:
- Think and jot down a financial achievement which you want to attain in the next month itself. It can be saving at least 10% of your paycheck.
- Write down a financial thing you want to achieve within the next year. For an example, paying off debt or a significant part of it.
- Now, list the things you want to achieve say in the coming 5 and 10 years. You may think about owning a home, having a certain amount of net worth, and so on.
Types of budgeting system – What will you choose?
There are several ways to plan a budget, track your efforts, and monitor your success.
- Using a spreadsheet: Instead of making one spreadsheet, you can browse for Excel budgeting worksheets to organize your information effortlessly. It will also help you do the necessary calculations easily.
- With a pen and a notebook: This is the traditional way to sit down with a pen and a notebook and create categories as per your requirement. Now just add your items and expenses and see where you stand and what you need to do.
- Choosing a free online software: Another way of planning a realistic budget is to choose a free web-based software program where you just have to give the necessary inputs and you can track your spending. Some software can also help you plan a realistic budget by comparing your one with others of similar income and lifestyle.
11 Tips to plan a realistic and effective budget and stick to it
After you have chosen your budgeting system and planned your goals, now is the time for the real action.
Here you go:
1. Make a fresh start:
Irrespective of whether you’ve tried planning a budget but it wasn’t successful or this is your first one, start afresh with the basics.
Think about how much you want to save or what amount you want to invest. It will help you plan an effective budget.
2. Take an account of every dollar you earn:
You have to assign an item for every dollar. It doesn’t mean you have to spend every dollar you earn; it means you allocate every dollar into different categories including your savings.
One of the best ways is to follow the backward budgeting technique. Doing so, you first put an amount to ‘savings’ and then plan your spending on the remaining money.
3. Keep it simple as much as possible
To create an effective budget for a stress-free life, you have to set realistic goals. So, understand your own habits; it will be easier for you to stick to it.
If it’s too difficult to follow it during the initial months, you’ll never be able to be successful in planning a budget to meet your financial needs.
Now, let’s talk about the basic principle of budgeting.
- Calculate your overall income taking into account all sources.
- Divide your income into different categories.
- If you’re following the basic or forward budgeting principle, calculate whether or not you’re able to save an amount that you want to; if not, then revisit your budget and repeat the process.
- If you’re following backward budgeting then allocate the expenses as per your requirements and check out whether or not it’s a realistic one; if it’s not, then think about increasing your income, look for ways to cut down expenses, or for the time being, reduce the amount you want to save every month.
4. One good way is to automate your savings
If you want to save at least 10% of your income, then you can opt for setting up automatic withdrawals from your checking account to your savings account once a month.
Based on your budget, if you think the amount is too high, start with saving at least 5% of your income.
Doing so, it will reduce your temptation to spend. Moreover, this will help you save effortlessly and won’t have to be stressed out about saving money.
5. Use the principle of Maslow’s Hierarchy of Needs to separate needs from wants
Maslow’s Hierarchy of Needs presentation can help you focus on spending that is necessary. It is a pyramid presentation where needs come at the bottom and it is necessary.
Your physiological needs (food, shelter, clothing, etc.) are right at the bottom and they are the basic needs. Then comes safety needs which are utilities, insurances, etc. As you go up, comes the need for luxuries, which should be given the least importance.
If you can’t do this, then you may face debt problems. If you buy expensive items with credit cards and are not able to repay the outstanding balances in full every month, then you may incur debt problems.
And, once you are into debt, you’ll have to add another category in your budget to save dollars to repay your credit card debt. Be it credit card consolidation or settlement, you’ll have an extra burden and will invite stress to solve your debt problems.
So, it’s always better to stay away from debt. And, if you’re already into debt, look for suitable ways to solve it and include an amount in your budget for the purpose.
6. Focus on increasing your income instead of only cutting back
Budgeting is all about cutting down expenses to attain your financial goals. However, this is not always true.
If you think that your income is not enough to plan a realistic budget, then try to earn extra. It may take some time but it’s a good way to plan an effective budget, follow it, and be stress-free.
7. Take into account your annual expenses and include them in your budget
We all have some annual expenses which can lead us to debt. But, if we include those expenses in our monthly budget, then we can tackle those expenses effortlessly.
For example, you can create a category named ‘holiday budgeting’. Now calculate how much you usually spend during that time, divide that amount by 12 and include that in your monthly budget.
8. Involve your family members to create an effective budget
When you’re planning a budget, you have to take into account every family member’s needs. You need to understand the other people’s attitude toward money and set universal or separate goals to fulfill everyone’s needs.
Moreover, it will help you to make your budget successful if all of you are on the same page and work together.
9. Use different accounts to separate expense categories
Another tip to make your budget successful is to use separate accounts for different categories. You can have one account for saving, one for fixed expenses, another for variable expenses, and one for an emergency savings account.
Do not use money from one account for other purposes. Doing so, you can keep track how much you’re spending and whether or not you’re on the right track.
10. Stick to your budget and make it successful
The rule to stick to your budget is to follow it, keep a track, and analyze it every month. Do not be stressed out if you’re not able to stick to it completely in the first month.
Make a fresh start from the next month and accept that occasionally you’ll spend a bit more.
11. Modify your budget with the changing requirements
You cannot plan a budget which will be effective for you for the lifetime. You have to make modifications as per your changing needs. For example, you need to make modifications when you’re getting married or planning a child.
So, revisit your budget occasionally and make changes when needed.
Doing so, you’ll be able to meet your financial goals and enjoy a stress-free life.
