How to set up a budget

Have you ever noticed how many people shriek when they hear the word budget? Yesterday, as I tackled my paper binders, I also reviewed some documents in more details. The ones which can have an impact on my budget.

My mom taught me how to set up a budget and while I don’t always stick to it (yes, I am human too), it’s been such a great gift. It allows me to plan my financial resources and take corrective actions as needed. Sounds very business like, doesn’t it? Well, it helps and makes your life easier.

If you aren’t budgeting already, try it for the summer and have more peace of mind!

Start with your overall income

What’s your total income? Write down your total monthly guaranteed income. This can be your and your spouse’s or partner’s salary, income from rent, interest earned, stipends, scholarships, etc. Use your pay checks and bank statements if you’re unsure about your income.

Here’s some simple math: No matter how tempting your bank’s offer for a loan or higher credit card limit is, stick to your overall income. Spending more than you make will take you into the reds, negative income, debt, you chose what you want to call it. Budgeting is meant to help you prevent it!

Check your current spending

Unless you already know how much you’re spending, write down all expenses for 2 weeks. This will give you an idea on your spending habits and will help you decide on the categories required for your budget and the amounts required.

Pay yourself first

Before you start splitting your available monies into the different categories within your budget, save some money. This can go towards your retirement (another word that drives people to the edge), your emergency fund (same again) or a specific goal.

Stick to the basics

Often we stop things when we over-complicate them. Keep it simple. This starts with defining which categories you want to plan for. Do you need to have “groceries”, “lunch”, “coffee” and “dinner”? Would “groceries” and “eating out” be sufficient?

Categories like “Savings”, “Mortgage/Rent”, “Utilities”, “Groceries”, “Dining Out”, “Education”, “Clothes/Make Up”, “Health”, “Car/Transportations”, “Insurances”, “Retirement”, “Leisure”, “Holidays/Vacation” and “Gifts” may be a good start for you. If you have any debt, keep an extra category for these repayments.

In what format will you keep your budget? Paper may be easiest. It’s always ready, provided you have a pen. Excel spreadsheets calculate the expenses almost automatically for you. Specific accounting software may suit you, if you’re managing multiple budgets.

Decide what you need and what you want

When deciding on your budget’s categories, ask yourself whether you need it or want it. Eating out may not be something you need. You can cook at home after all. Eating out may be something that you want though.

Put it all together

Now that you have a clearer vision about the available income and the categories you have established, let’s put some numbers to each category. How much do you need and want to spend on each category?

First, start with putting some money aside for your savings. This should be your first priority if you don’t have any debts (excluding your mortgage). If you’re paying back a loan, still set some money aside for your savings, however, ensure you can meet the monthly repayment terms.

Next, look at your essential (need) expenses like rent/mortgage, education fees and insurances. These expenses are normally the same from month to month and need to be paid. Make sure that you pay these bills on time.

You will have other need expenses like your utilities and groceries which can vary from month to month. You can budget a higher amount and put any unspent amounts into a special savings account called “Utilities”. Earning some interest while you don’t need to spend these amounts is fantastic!

Then, review your want expenses like dining out and gifts. These expenses can vary from month to month and by budgeting, you can plan for the various amounts required within your budget. In one month, for example, you may not need to get any gifts and can reduce the funds for gifts. You may choose to set these savings aside, like in a special savings account even called “Gifts”. In the next month, when you have a number of invites, budget either a higher amount or you can withdraw money from the special “Gifts” savings account, if you’re setting the same amount aside each month.

Finally, consider any seasonal expenses. Eid is coming up in 2 months and it’s the time of giving. Spending more time with your family while eating special foods may require additional money. Christmas is another seasonal expense. A holiday this summer or special activities during the summer would be other examples.

Do you want to follow a certain distribution

Some people use the 50/20/30 rule when dividing their income across their different budget categories. 50% of the available income goes to fixed expenses, 20% towards savings and 30% to variable expenses, which may be your want or your seasonal expenses.

Setting up a budget can be easier than you think. If you haven’t created one yet for this summer (or year), start today by recording your current expenses. In my next post, we’ll follow up and we’ll look at tracking of the expenses and how to stay within budget.

If you are already using a budget, what has made you start working with a budget? What’s been the easiest and most rewarding part of using a budget? For me, knowing whether I can afford a piece has been the most satisfying of keeping a budget and tracking it. Let us know your story and share it below!

Until next time,
Agni