Do you want to save but don’t know where to start? Financial experts are always telling us to draw up a budget. The reason for this is simple: it is the most traditional and simplest way to become aware of what is happening with your money.
What is a budget and what is it for?
Almost everyone understands more or less what a budget is: it is a tool that records your expenses and income, as well as how these evolve.
Thanks to this you will have better control and insight into your personal finances. A good budget will allow you to:
- Find out what you really spend your money on. With a budget you will be aware of your cash flow, how much you earn and how much you spend. With that data you can take steps to focus the way you use your money for your life goals and the things that make you happy.
- Identify expenses you didn’t know you had. If you have never made a budget before, the result will surprise you for sure. You will find items you didn’t know about and others that you thought you were spending less money on.
- Know your debt ratio. In other words, what percentage of your income you spend each month to pay off debt. You will also have a better idea about how long you are going to be repaying those debts and you will be able to calculate whether it is worthwhile paying them off early.
- Know your current savings capacity. A budget will tell you what your current savings capacity is and provide you with the tools to increase it, so that you can reach what you should be saving according to your age.
Having a budget of your personal finances will also help you reduce your financial stress if, in addition, you use it to help you save. Another advantage of a budget is that it will make any conversation about money at home easier, and avoid a lot of arguments.
How to draw up your household budget
The first thing you should do is gather the tools you will need. Nowadays there are apps that allow you to track your expenses and income automatically. However, an Excel spreadsheet is still the easiest and most convenient way to track your budget without relying on third parties.
With your Excel sheet open, just decide which items you are going to include in your budget. Here are the steps to follow:
Add up your income
You can put this in the first column. Remember to put all your income together, from your salary to other income you may receive from rental properties, for example.
If you want more detail, you can divide this income according to where it comes from. For example, salary 1 and salary 2 if there are two of you.
Add up your expenses
This is the category that will really open your eyes to your financial status. It is also one of the keys to not abandoning your budget at the drop of a hat.
The income section is usually the simplest. Everyone knows how much money they earn per month or year and where that money comes from. Expenses are not the same, nor is there such a clear categorization.
At this point you have two alternatives.
The first option is the simplest. It consists of differentiating between fixed expenses and variable expenses. The former are very easy to identify by checking your bank account. This includes household utilities, insurance, gym membership, the children’s school, and so on.
Identifying your variable expenses will take a little more work because they are usually related to leisure, although there are also items like groceries and transport.
The second option is to follow the recommendation of the National Securities Market Commission, which divides expenses into:
- Obligatory, which are those that you have to keep paying and that you can’t really decrease, such as your mortgage or community charges.
- Necessary, which includes expenses such as electricity, telephone, internet, and so forth. What differentiates these expenses from the previous ones is that they can be reduced fairly quickly and easily, although not completely eliminated.
- Occasional expenses, which are those that you can eliminate if you have to.
Add and subtract: how much money you have left over each month
Finally, just add up your income and subtract your expenses. The result will tell you where your finances stand.
If the result is positive, congratulations, you spend less than you earn. And if the result is negative? In that case there is a mismatch in your finances that you should fix by reducing some of your expenses.
Take advantage of this information
A family budget is just a tool to tell you what your cash flow is. What is really important is the information you can extract from it to change things. In other words, to take action.
You can use that information to:
And you can even do nothing if you like what you see and it is in line with your life goals.
So now you know how to budget, how do you make sure it lasts?
Most people will make a budget and stick to it for a month or two. After the initial novelty wears off, it’s easy to forget about it. Is there anything you can do to prevent this from happening to you? Yes, these four tips will help you avoid this:
- Why do you need to have a budget? You can budget to save money, because you want to know the state of your finances, or because you feel like you spend too much. Depending on what you’re looking for, you’ll need a more or less comprehensive budget.
- How often do you want to update it? This is a key factor. One of the reasons budgets are abandoned is because the first one was so detailed that maintaining it was too much work. If you plan to update it, start with a basic budget with limited data.
- What level of detail are you looking for? In line with the two previous tips, think about how far you want to go. Do you really want to control every penny of your finances each month or is it enough to do this each six months and have a more basic monthly plan?
- Automate as much as you can. An Excel spreadsheet is still the greatest tool for your home accounting, but nowadays there are also various apps that can help you collect the data from your accounts automatically. That will save you a lot of work and effort.
Finally, if you really want your budget to last, make it worth sticking to. If you’re only going to use it to see how you spend your money and not to make decisions, you’ll probably end up giving it up. That’s why the best way to have a life-long budget is to really make the most of it.