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Budgeting may seem too complicated and frustrating, especially when you don’t know where to start. But in fact, it’s just a healthy habit that will be seamlessly integrated into your daily life with time and practice. Budgeting helps you save and multiply your money, achieve financial goals, feel secure, and be confident in the future. And it’s not hard at all! We have brought you 8 simple and effective steps to build your financial muscles.
A new habit requires time and effort, so it’s important for your brain to understand why bother doing it at all to stay motivated. Start with deciding on your priorities in life to choose what you will save for in the first place. Do you want to pay off your student loan? Dream of a trip around the world? Or maybe you plan to start your own business? Pick the right options for you.
Then break down your financial goals into short-term and long-term targets. Long-term goals are strategic: they may take years to be achieved, so it’s best to start now. They can be, for instance, retirement savings or a down payment on a house. Short-term goals such as a vacation in Spain, a new car or home renovation are tactical as they cover your immediate needs and wishes. They help you get disciplined about your money, harvest the first fruits of your newly acquired budgeting habit, and eventually accomplish your long-term goals.
Once you’ve decided on your long-term and short-term goals, invest some time in research to find out how much money exactly you’ll need for each goal. This will help you understand whether the goal is achievable and how long it will take you to achieve it. For example, if you are planning to remodel your kitchen, find a suitable contractor and request a free quote estimating the cost of materials and labour. Or if you are going to go on vacation, find out how much tickets, hotel, and guided tours will cost you, and estimate how much money you need to take for expenses by studying the prices at the destination.
The correct goal formulation is also very important. By this criterion, all goals can be divided into strong and weak ones. A strong goal ignites a fire within, giving you the strength to keep moving forward even in harsh times. “Save for a house” is a weak goal that will not give motivation. A strong goal would be “to buy a two-story house by the lake with a fireplace, around which I will spend cosy evenings with my family”. You can add one, two, or more details: it is not the number that matters but that they help you not to give up under any circumstances. It is also useful to visualise your goal – whether to draw it or find a suitable image – so that you return to it regularly and remember what you are doing all this for.
The next important step is to track how much money you earn and spend each month, where it comes from, and where it goes. To do this, create a spreadsheet or, better, install a dedicated app and use it to record every receipt and write-off during the period. Enable push notifications in your banking app so you don’t miss any transactions, and use the expense categorisation feature, if any, to get an overview of your spending habits. In this case, you can do without additional tools. The ultimate goal is to make sure that your income minus expenses is greater than or equal to zero.
So, now when you have a complete picture of your sources of income and buying patterns, it’s time to divide your spending into two major categories: essential and non-essential expenses. Essential expenses include rent, utility bills, insurance and loan payments, groceries, and commuting costs. Non-essential expenses might include entertainment, hobbies, clothes, education, and so on.
While it is quite hard, yet possible to cut your essential expenses, e.g. find lower-rent housing or buy groceries in bulk, your wants and wishes are much easier to save on. This does not mean you have to deny yourself pleasure and reduce the quality of life. On the contrary, this will help you eliminate unnecessary expenses and allocate extra money to what you really want to have. Here’s what you can do:
Congratulations, you have already done a great job: you set your financial goals, figured out how much money you spend and on what, and even started saving. Now is the time to take matters into your own hands and start budgeting. How? First of all, make a financial plan for the year so that you understand what resources you’ll need and what for. Note down all the big purchases, trips, the amount you want to set aside for a long-term goal, or, say, the percentage of debt you’d like to pay off. Remember to be realistic about your capabilities.
After that, you can proceed to planning your monthly budget. To do this, pick one of the common budgeting methods such as the zero-based budget, the envelope system, or the 50/30/20 rule. All of them involve breaking down your expenses into areas or categories and allocating a certain part of your income to each, but they employ different approaches for that. The zero-based budget means that every dollar you earn has to be assigned a specific purpose. For example, you spend $600 a month on groceries and not a cent more. Categories and amounts may change from month to month, but at the end of the period, your account balance should be zero. This method is better suited to people with predictable income and expenses who are particularly fond of maths. However, it may also act as a great vaccine against overspending.
The 50/30/20 rule is a more flexible approach giving you more freedom in personal finance management while ensuring you budget efficiently. It assumes the distribution of your after-tax income as follows:
It is recommended to start your month by transferring the set amounts of money to your savings accounts and then making your essential payments wherever it’s possible. Try to top up your transport card, pay rent and all bills, and make payments on loans and insurance. The money reserved for groceries can be transferred to a separate card. Thus you’ll end up with 30% of your income left on your balance to spend for fun, so you’ll clearly understand what you can afford now, and what you’d better postpone for later.
The beauty of this method is that you can tailor the percentage of each category to fit your needs. Let’s say you want to set aside 30% of your income vs. 20%. In this case, you can curb your non-essential expenses, figure out how to save on essential ones, or even find an additional source of income. It is you who holds the keys to the kingdom.
Whatever budgeting method you opt for, don’t forget about emergencies and unexpected expenses that everyone has from time to time. To prevent unforeseen events from taking you by surprise, open a rainy-day savings account and transfer the desired amount (usually 5–10% of income) to it every month. This will give you confidence in the future and help you stay on track even when faced with obstacles.
Living within your means is a thoughtful approach, but remember to treat yourself. Think about how you can reward yourself without going over your budget. Maybe visit a spa or go out of town for the weekend? New experiences expand our comfort zone and encourage us to earn more so that we can afford more. However, do not neglect services providing discounts like coupon apps.
Set the bar of your choice: e.g., increase income by 10% every three months. Don’t know how? To get started, brainstorm and write down all your skills – there should be at least 50 of them. Skills like “communicating with animals” and “weaving beautiful braids” should also be on your list. We often have no idea how many different things we can actually do. Then think about how these skills can be combined and monetised. For example, your talent for growing avocados in pots and your ability to communicate clearly can be useful to other houseplant lovers: you will talk about your favorite hobby, help other people, and get rewarded for your advice.
Another more straightforward and more obvious option is to raise income at your current job. Talk to your manager: maybe they have additional tasks for you, or it’s time for a promotion. If you have your own business, think about scaling out or scaling up, i.e. try to attract more customers and sell more, or improve service or product quality and sell at a higher price.
Money should not remain useless, not least because it loses its value. Think about where to invest your money so that it generates income. Of course, it’s not worth investing without knowing the game, so do some research or consult a financial advisor first. Your stuff that lies on the shelves collecting dust could also benefit both you and other people. Unclutter your home by selling everything that you have not used for more than a year: most likely, you don’t really need or like these items. They will find a new life, and you will enjoy living in a more comfortable space.
Last but not least, dedicate 30 minutes a day to your financial education. Read books and magazines, watch videos on YouTube, listen to podcasts, play financial literacy games – choose what you like most and develop your financial planning and budgeting skills.
So, now you are equipped with simple and effective budgeting tips and ready to put them into practice. Pick the approaches and tools that work best for you, and don’t forget to reward yourself for achieving your financial goals! Living in the here and now is just as important as creating your future.
The information is not intended to provide investment recommendations and opinions of any kind, and the financial instruments mentioned in it should not be considered as any kind of advice or offer to act or refrain from acting. It is your responsibility to determine whether a particular tool or method matches your interests, goals, and acceptable risk level. CFPS is not responsible for possible losses in the case of performing actions mentioned in the article and does not recommend using this text as the only source of information when making a decision.