Creating a budget that works may seem like a challenge. No matter how many cutbacks you make, getting the numbers to line up right can be challenging because you need to consider many costs.
It might seem easier to just give up on budgeting and go on with your current approach, which does not involve too much effort. However, one crucial step to managing finances is having a budget that outlines how to spend and save your money intentionally.
Let’s go over everything you need to know to create a budget that works for you and your financial situation.
1. Know your net income
Net income is the foundation of creating effective budgeting. To know your net income is by calculating your take-home pay or salary minus the tax and employer-provided benefits such as retirement plans or insurance.
Focusing on the total salary rather than your net income may lead to overspending. Without considering your tax and other deductibles, you will think you have more money than you actually have.
2. Track your spending
After knowing your net income, the next step is to determine where you spend. Plan your spending by categorizing your expenses. You can start by listing your fixed and regular monthly bills, such as rent or mortgage, utilities, and student loans.
Next, determine your variable expenses, such as groceries and entertainment. You can reduce your variable expenses if you want to save more. Last but not least, plan how much you want to save every month.
Always tracking your expenses will help you evaluate your spending and avoid overspending. If keeping track of everything is a headache, use an app or service to monitor your bank account activities and reveal what you’re spending the most money on. You can also read about the best personal finance apps here.
3. Understand your needs and wants
Needs are things that you cannot live without. We all need certain essentials, such as housing, transportation, and food, to survive and maintain our living standards. Evaluate what you need, and create a list. Items in the “needs” list differ slightly from person to person.
Personal or discretionary spending sometimes contains everything else in your budget. It includes things like buying new clothes, dining out, entertainment (streaming services, video games, etc.), gifts, and other goods and services that aren’t necessary for your survival but are nevertheless important to you or provide you with some sort of pleasure. Wants are less essential and you still can live without them, but you desire to have them in your life.
4. Set your financial goals
There are two types of financial goals; short-term and long-term goals. Short-term goals should take around 1-3 years to achieve, including saving for your emergency funds.
Creating an emergency fund should be your priority if you don’t have it so far. This savings account holds 3 to 6 months (or more) of basic living costs. If you unexpectedly lose your income, this money will help you stay on track.
Long-term goals may take decades to achieve, such as saving for retirement or children’s education. It’s never too early to consider retiring, regardless of your age. Choose the amount of money you can safely set aside for this aim. The same is true for your children’s education.
5. Make a plan on how much you need to live on
Look at the expenses, and see how much you spend on necessities. Then you may look at your income and priorities. Afterward, set a specific and realistic spending budget for each category of your expenses. It will give you a barebones budget, the absolute minimum you need to survive each month.
If you have no idea how to allocate and plan your budget, you can follow the 50/30/20 budgeting rule. In this rule, you can spend 50% of your income on your needs, 30% on wants, and 20% on savings. However, this is not a universal rule that you must follow. Once you understand this simple budgeting concept, you’ll always be free to create your own budgeting rule.
Bonus: Tips on how to increase your savings
There are two options: cut back your spending or earn more.
- You can ask for a raise at work or start a side venture to increase your income. Anything from a part-time job to becoming a freelancer, such as doing copywriting and tutoring, can generate a few hundred bucks more per month. This can provide the extra cash boost required to meet your financial goals.
- You can also reduce your spending. We suggested finding out how much you need to live on. If you only require a quick financial infusion, you can remove some or all of the flexible category items. A month without eating out may not be deadly.
Having a clear, easy-to-understand, and up-to-date budget can be a financial game-changer. It just gives you such a clear, big-picture view of your money.
Lastly, Don’t forget to align your investment with your faith. Upholding your faith in your investment would bring peace of mind without worrying about earning from unlawful (prohibited) sources. Musaffa has built a halal stock screener to help you align your investment with Islamic values. Feel free to sign up at Musaffa.com
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