Many of us struggle to manage our monthly salary and end up going broke before the 10th of the following month. That’s because we do not budget our finances.

A budget is a well-defined plan that shows how to manage finances. This plan helps us allocate our finances to expenses that’ll last us through the month and also cut down on unnecessary spending. 

To make your salary last long, you should have a detailed budget. This article is a guide that shows you how to create an accurate budget that works for YOU, not against you, in these five steps:

• Calculate your Net Income:

Your contract might have stated a whooping pay of 6–7 figures, and you’ve started planning how to enjoy life to the fullest with the money. While this is good, you should note that your payroll or contract figure is your gross income and might not be your take-home pay.  When creating a budget, focusing on your gross income can lead you into debt or even overspending. 

What you should be concerned about when making your budget is your net income. Your net income, also known as take-home pay, is the amount of money that remains after subtracting taxes and deductions from your gross income. Your net income helps you calculate how much money is coming in that month. 

If you are a freelancer, contractor, or self-employed, you must take extra notes of your income to manage your net income properly. 

• Track Your Spendings:

Now that you know the net income, the next step is tracking your spending.  Tracking your spending helps you understand how much you spend, what you spend on, and how to make a convenient budget. 

To track your expenses, you have to first categorize them by breaking them into needs, wants, and savings. You can draw up a “table of preference” to help you categorize these expenses based on priority. That way, you can easily note essential needs and eliminate unnecessary wants that drain your income. 

• Set Realistic Spending and Saving Goals:

It’s impossible to have a realistic budget without setting plausible goals. Having a goal in mind helps you through the whole budgeting process. 

Financial goals serve as a foundation for a budget that shows the direction the budget is to follow. It can also serve as your motivation to manage your funds properly. For instance, having a goal, like a vacation, helps you cut down on unnecessary expenses, so you’ll meet your goal. 

• Create a Realistic Budget:

By now, you’ve identified your financial goals, tracked your spending, and categorized your expenses. It’s time to bring it all together and create a budget plan that you will stick to. At this point, you’ll have to compare what you want to spend with what you are actually spending. 

Make a list of your monthly expenses and allocate an amount to the list. Make sure the allocated amount covers all the necessary costs to avoid running into debt during the month.

Using the 50/30/20 rule when budgeting can help you effectively split your net income into three categories. The 50/30/20 rule divides your income into 50% for needs, 30% for wants, and 20% for savings.

The 50% for needs should include your three basic needs and other relevant needs. For instance, a data subscription would be a need for a freelancer but might not necessarily be a need for a farmer.  The 30% for wants would cover relaxation, enjoyment, and likely emergencies. 

A part of your monthly income should go into savings. That’s where the remaining 20% comes in. This 20% is the most important part of your income and should not be toyed with. In the words of Warren Buffett, “Do not save what is left after spending, but spend what is left after saving.”

• Review Your Budget Regularly:

Like your CV, your budget is a living document you must regularly review. After you’ve created your budget, you should make it a routine to review your budget and track your progress regularly. 

Also,  you might either receive a raise or change your priorities and lifestyle. Constantly monitor your budget to see if it needs to be reviewed based on these terms. 

Conclusion

The budgeting process should be simple, as no strict rules are involved. The above steps are to help you budget your income in a realistic way that enables you to achieve your financial goals. As the cost of living keeps increasing, having a realistic budget is essential to manage your finances and develop proper financial habits.