How to Make Budgeting Work for You
Creating and sticking to a budget is an important step toward financial stability and achieving your long-term money goals. But what is a budget? By definition, a budget is a statement of the finances of a group or individual for a certain period of time. A budget is based on estimates of expenses and income during that time period and is used to track the financing of your expenses. Managing your finances with an individual, family, or business budget can be quick and simple without the need of personal savings or a large income.
Creating a Budget that Fits Your Goals
Despite various challenges that may come with sticking to a budget, there are multiple advantages of achieving your financial goals such as building your credit, gaining more financial independence, or paying off debt. In the short-term, budgets can help both individuals and corporations to manage their operational costs, putting purchasing power back in your hands.
How to Create a Budget as:
A Household
A family budget is your tool to monitor the money coming in and going out of your household over the course of a month. It is a clear indication of how your money is being spent and can, over time, reveal where you need to change your financial habits.
- Begin with estimations. Outline your budget with a number to work with such as your gross income. This is the entire amount of money you plan to earn over the course of a month. This can be combined with another member of your household or just yourself as an individual budget. This is the total number you will deduct from when budgeting for your monthly expenses such as rent/mortgage, food, gas, utilities, debt, and other necessities.
- Identify excess expenses. Are you paying for services you don’t use or can cut back on? Do you need to negotiate a loan due to high interest rates? Your budget will clarify where you are spending most of your money.
- Relocate your expenses. Once you have a working budget and have identified where you might be overspending, you can now move those funds to other areas of your budget in ways that help you achieve your financial goals. You could pay more than the minimum balance on a loan, contribute to an educational fund, or allocate the expense into a high-yield savings account. A financial advisor at KC Unidos Federal Credit Union can connect you to a variety of bank accounts to help you on your path to a better financial future.
A Student
Managing personal finances as a college student can be complex when including school feeds such as tuition, books, lab fees, room and board and more in addition to other living expenses such as gas, insurance, etc. Budgeting can help lead you towards financial stability when dealing with high and frequent costs.
- Identify your total income and fixed expenses. Your total income is how much you have in total without the contribution of a monthly income. This could be money from family and friends, financial aid, grants, and loans. You can create a budget with your total income or incorporate the funds with a monthly income, a recurring income earned from a job. Your budget could probably include both fixed and variable expenses. A fixed expense lives up to its name by being an expense you can expect month after month at an amount that most likely remains the same. This could be loan payments or insurance bills. Variable expenses can be harder to budget for as they change from month to month such as utilities, gas, groceries. This is where your budget can really work for you by helping you identify if your variable expenses are more necessities or wants.
- Flex your elementary math skills. Now that your income and expenses have been identified, it is simple to crunch the numbers by subtracting all of your expenses from your total income. This allows you to see where you can cut back on variable expenses.
- Set a timeline. Unlike a household budget, a student budget can be broken down into more specific timelines beyond a monthly timeline. Try making a financial projection budget per semester to adhere to or, if possible, per academic year.
As a Small Business
Budgeting as a business is most likely less about achieving specific financial goals and more about covering operational expenses and remaining solvent. Additionally, a budget can affect multiple areas of your business beyond strictly finances by helping your business operate more efficiently, add towards business growth by identifying where you are the most profitable, and help you keep control of your business overall.
- Identify your fixed and variable income and expenses. Like a household and a student budget, small business owners need to establish how much income is coming in and what it’s going towards. Once your fixed and variable funds and expenses have been identified, you can prepare your business for what may lie ahead.
- Create a contingency plan. Unlike the expenses in a household or student budget, small businesses can experience completely unexpected expenses at any point in time. This could be manufacturing costs when a piece of equipment breaks or perhaps the cost of goods have risen beyond what you’ve budgeted for. While some might be tempted to put surplus income back into your product or operating cost, saving any extra funds from budgeting is a great financial practice to protect your business.
- Create a profit and loss statement. As a business this is when you find out if your budgeting and business performance has led to profit or a loss at the end of your selected timeline. A profit and loss statement can be created by adding up all of your monthly expenses and then subtracting the total income. If the number is above zero, you’ve made a profit, if the number is below zero (ex: -1, -2, -3) you’re currently operating at a loss.
Best Practices
Now that you know the “why” and “how” of budgeting, get started with tools and best practices to enhance your budgeting power.
50/30/20 Rule
How do you know if you’re saving enough or if you’re on-track with your expenses? This rule is a guide to help you allocate funds in your budget in a way that keeps you in control.
- 50% - Needs like mortgage/rent, utilities, etc. (fixed expenses)
- 30% - Variable expenses
- 20% - Savings
Dividing your income up into these three categories can help keep your budget outline in balance.
The Power of Cash
Stay ahead of your spending by opting for cash transactions over purely credit card purchases. This practice shows you how much you’re spending and how quickly. Having five dollars and then spending five dollars could be more impactful than making small purchases that show up later on your credit card statement.
Withdrawing a certain amount of cash from your checking account each week or each month and relying on those funds can help keep you from overspending. The combination of cash and credit purchases for fixed and variable expenses keeps you on track building credit with the purchases you know to budget for each month while cash clarifies your small purchases you could cut back on.
Free Tools
Creating a budget doesn’t have to require expensive software. There are plenty of tools that allow you to create spreadsheets that track your spending and income. Either from your smartphone or computer, you can use apps like Google Sheets that offer robust functionality to create charts, tables, and more to monitor your personal or professional spending.
Get Started with at KC Unidos Federal Credit Union
Our financial advisors connect you to our latest information on our debit cards and certificates as well as open a checking and savings account. KC Unidos Federal Credit Union offers both individuals and small business owners saving and purchasing power with simple steps to getting started. Schedule an appointment today to come in to speak with our advisors in the heart of Kansas City, Missouri to open your checking or savings account or learn more about budgeting.
