The word budget we constantly hear it and despite understanding its meaning, few people give a quick and accurate definition of this term. Even knowing its importance, they do not know how to budget.
“Having a budget is the difference between being financially responsible or being in constant financial danger”
Taking into account the importance of managing your money when creating a business, we have decided to make this article a step-by-step guide so you can learn how to create a budget that you can apply in your personal life and in your business.
What is a budget.
If you do a quick search on the internet on this term, you will find that it is an advance calculation of the income and expenses of an economic activity, whether personal, family, business or government, which is generally done annually.
Put simply, a budget is the process of creating a plan to spend your money wisely, allowing you to determine in advance if you have enough cash to do whatever you want to do with it.
Why is a budget important and what is it for?
Having a budget ensures that you always have enough money and most importantly, it will keep you out of debt and help you get out of it if you currently have it.
A budget basically fulfills two objectives:
- Organize your finances.
- Prepare for all kinds of financial emergencies.
So do you want to know how to budget?
How to budget:
Step 1: Evaluate your finances.
Evaluating your finances is summed up in knowing what your net income is.
Your net income is the amount of money that is free after paying off all your debts. Your net income is all the money you make in a month (salary, bonuses, investments) minus your expenses, which are all the debts you have in a month.
You should keep in mind that you have fixed expenses and variable expenses. Fixed expenses are those that remain the same from month to month, such as the monthly payment of your home or vehicle, the cell phone bill, cable service, etc.
On the other hand, you have variable expenses, such as utility bills, such as electricity and water, and you also have the payment of gasoline, food, and the money you spend on entertainment.
Net income = Monthly income – Fixed expenses – Variable expenses
Step 2: Analyze your monthly expenses.
Once you have calculated your net income, the next step is to carefully analyze your expenses. This with the intention of knowing exactly what you are spending and if you have any possibility of reducing this amount, which will end up increasing your net income.
It is possible that you have never tracked and recorded your expenses, if you have not now is a good time to start always asking for receipts for everything you buy or writing these sums of money on your phone.
Most people tend to estimate their spending and keep a ballpark figure in their head, but you will realize that there is a big difference between estimating your spending habits and your actual spending.
Put these expenses into different categories. Even though we all have different lifestyles, we can all place our expenses in the following categories: Rent, utilities, transportation, food, health, internet, savings, vacations, etc.
Now, if you don’t want to get complicated with so many categories and have full control of your money, this method is perfect for you.
Doing this exercise you will realize the amount of money you spend unnecessarily and that you could be saving and investing.
Step 3: Register your information in a database.
If you like the old school, your database will be a notebook, but since you surely keep up to date, you know that you can record all your financial movements on your laptop or phone.
Softwares like Microsoft Excel and Youneedabudget, or apps like Spending Tracker will help you not only to record your valuable financial information, but also to track and analyze and control your spending habits.
Whichever option you choose will help you stay out of financial trouble and understand how to budget.
Step 4: Make your own adjustments.
After having collected, recorded and analyzed your financial movements, you will know exactly if your expenses are excessive.
It is very common for you to have money leaks that you would never detect without the help of a budget and it is in this step where the most difficult part comes: start reducing your monthly expenses.
If you did not know how to make a budget, this is the moment for you to start working on one. This is the first step towards financial freedom.
If it is useful for you, we have created an Excel template with the basic information you need to create a personal budget.
There are more complex templates and with much more detailed information, however we don’t want to make this process complicated, on the contrary we want you to really turn this into a habit and start improving your tools at your own pace.
The idea is that you modify it according to your reality and adjust it to your needs. You can download the template totally free by CLICKING HERE.
And remember that if you are really interested in creating your own business, you can purchase our book “How to create a company while working: Discover how to manage your time, manage your money and motivate yourself while creating a company and working for another” , where you will find all the information you need to found your own company, without having to leave your job.
