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Business

12 Steps to Successful Budgeting

By André Mikhail Obierez, RFC, CWMS, CPS

April 02, 2020

“A budget doesn’t limit your freedom, it gives you freedom!” – Dave Ramsey, an American radio show host, author and businessman

Have you ever been in a situation where just days after payday, you have nothing left in your pocket? If not, that’s good but that, and other petsa de peligro stories are nothing but common tales in the office. It all boils down to two things – failed budgeting system or no budgeting system at all. But why do we need to budget anyway? The simple answer is: it allows us to determine in advance whether we will have enough money for our needs and wants.

People think that budgeting is synonymous to depriving yourself of your wants and that’s why people have a hard time building a successful budget. Admittedly, coming up with a budget that truly works for you is difficult because there are a lot of considerations to be made. Not to worry because in this two-part article, we will help you do just that!

 

  1. Understand income

The key to successful budgeting is knowledge and you get that by understanding your income. Income either comes from your work or investments. When you work, you are paid in exchange for the service and effort that you offer. When you invest, you take the time to let your money grow. By understanding your income, not only do you identify the amount of money you have coming in but you also realize the true value and worth of your money. You become mindful of where your money goes and so you tend to not waste it.

2. Understand expenses

Knowing where your money goes right after you receive it works wonders! It primarily allows you to understand where you spend the most (provided they cover your needs) and the least and so when you build your budget, you’ll have to allocate a bigger portion to those where you spend the most. You also know where you can make adjustments because let’s face it, things happen and it is ideal that your budget should be adaptable to these changes.

Fixed expenses like rent, mortgage, utilities, and loan payments, are non-negotiables so you can never cut back on these. Variable expenses are those that may change from month to month such as groceries, gas, and entertainment, and so this is where you might be able to cut back. Additionally, tracking your expenses help you identify your spending habits, especially that as Filipinos, we have spending habits that secretly eat a significant chunk of our budgets.

3. Set goals

Setting goals is the cornerstone of financial success. In budgeting, your goals serve as your guide and because you have a guide, you have a clear idea where your money should be going. Most people actually set goals. When you first started budgeting, your goal probably was to get out debt, but once you achieve this, then what? What people need to remember is that the goals that you set for yourself should be dynamic. Once you reach one goal, you can set another, preferably one that will give you security in the long term. That way, you would not lose your motivation to stick to your budget.

4. Understand your personal habits

Every person is different. There is really no one-size-fits-all plan for budgeting and this is why you need to understand your personal habits. This will help you identify your needs and wants. When you do this, you may notice that you are spending money on things you don’t actually need. Once you realize that, you then make smart financial choices, like postponing some purchases rather than going into debt. In the larger picture, you’re able to stick to your budget if you are aware of your personal habits.

5. Get a system in place for savings and spending

Budgeting is hard without the right system in place. Once you’ve taken into account your income, expenses, and spending habits, the next thing you want to do is to design a system that incorporates all of those. Some people follow the 50/30/20 rule, 50% for needs, 30% for wants, and 20% for savings and because we’ve established already that every person is different, you can modify this to fit your financial situation. Still, others may opt to a highly-detailed system where they further break down their specific needs and wants and that works as well. Whatever system it is as long as it’s tailor-fitted to your situation and goals, that’s alright!

6. Plan income

If you fail to plan, you are planning to fail. Hence, if you want a successful budget system, you have the plan for the main thing that drives it, in this case, your income. Understanding it is one thing but planning it to actually make it work for you is a whole other skill that you need to be good at. By planning the amount of money that comes in, you effectively manage your income because you know how much money you’ll have to spend on something, whether that’s a need or a want. Budgets are intended to keep your expenses lower than your income and you can do that by planning your income.

 

And that’s it for the first part on your journey to successful budgeting, dear reader! By now, I hope you understand the essence of budgeting success. Next week, we’ll tread on the second half of this journey and hopefully completely establish how successful budgeting contributes to your financial success. See you!

Disclaimer: Just a reminder, dear reader, that the content in this column is my opinion only and should not be construed as investment advice because I am not your financial adviser, neither did I take into consideration your personal objectives, financial situation, needs or circumstances as your fiduciary. It is mainly for your entertainment and education only.