Creating a budget to achieve your financial dream
Posted
You are walking down the street and stop in front of a house. You look at it and find it beautiful. Even perfect to raise a family. Lucky you, there is a sign saying the house is on sale.
Then you look at the price and … way above what you could ever imagine owning.
This situation is true for a lot of people. Owning a house (or anything expensive for that matter) is a dream that is often unachievable.
How do you achieve such a goal?
Unfortunately, there is not a magical way where you don’t have to do any effort. You will have to prepare your path to your financial goal and stick to it as much as possible.
The first step - Creating a budget
A person with a financial goal MUST have a budget.
It does not have to be written down, but it helps to not diverge from your initial budget.
What is a budget anyway?
According to Merriam-Webster, a budget is
“the amount of money that is available for, required for, or assigned to a particular purpose”
“budget” Merriam-Webster.com.
In the context used before, if you want to buy a house, you should have a budget for it.
Done, all set. This article is over.
Is it? No. If that would be that easy, you would not need to read an article about it.
If you only budget your future home, you will have an envelope in which you put money. This money goes towards your house, but when will you be able to buy it?
If you can’t answer this question that means your budget is not good enough.
You could say you want to put the same amount of money in your “house” budget every month. That way, you can say when you will have enough money for your house.
However, how do you know you have enough money for everything else?
To be useful, a budget needs to take into account all the aspects of your life.
You need food to survive. You need shelter while you save for your future home. You also need to have fun.
All of these aspects need to be budgeted to know when you can expect to achieve your financial goal.
You also need to keep in mind that life is not a long peaceful stream. You will always have unexpected situations. You can prepare for these in your budget as well.
The amount you want to budget for these unexpected expenses should not be too big. Otherwise, that means you did not budget correctly in the first place.
However, for your first budget, don’t try to minimize it. With experience, you will be better at reducing this amount.
I got it. How do I create a budget now?
What is really important in a budget is to have a way for you to ensure you follow it correctly.
That means you need to have a way to describe what you want to budget and a way to categorize expenses in these different budgets.
So, what do you put in your budget?
First of all, you want to put the information on how much you earn.
Your income will help define what is available each month for your different budgets.
In the example above, I put two different incomes in two different rows.
After your income, you have to define the different types of expenses you have.
You may have different budgets that have different recurrences. For example, the utility bill comes every trimester while the rent comes every month.
The example above is not a complete list of the budgets you need to create. This is a very personal task to do, but here is a pre-compiled list of common budgets you can have:
- Rent
- Phone bill
- Internet bill
- Food
- Different insurances
- Vehicle maintenance
- Vehicle fuel
- Public transportation
- Restaurants
- Clothes
- Health
- Holidays
- Other
One of the budgets people might forget is savings. This is in my opinion one of the most important budget to have. It is easily forgotten as you don’t directly see the effects of savings. It is a good practice to think about your future when living your life. Your future self will thank you.
I will go into detail in another article on how you can save money and most importantly, where.
Validating your expenses
Having a budget is the first step to have a healthy financial situation. The second step is validating your expenses.
Validating your expenses allows you to understand if you overspent or not. This is the hard part as you are confronted with your desires. It is easy to say that you want to have only 50CHF of restaurants per month. However what happens once you arrive at 45 CHF?
Do you allow yourself one last restaurant? Or do you stop for this month?
This question is for you to answer. If you decide to do one last restaurant, you can still correct your budget as explained in the next section.
This is important to have an easy way to enter your expenses. That allows you to easily verify that you do not overspend in a budget for a given month.
To easily see your current spending on a budget, you can plot the current spending for a budget compared to the maximum amount of the budget.
I enter my expenses every time I spend money, but I check my expenses every few days.
I know if I need to cut short on the restaurants or on the fun activities to stay in my budget.
If you are a bit tight financially, checking more regularly allows you to be more careful and avoid overspending.
What if I made a mistake with my budget?
It can always happen that you make a mistake when budgeting. Either you have too much money on a budget or you see that you don’t have enough.
If you did a mistake and notice the amount is not correct at all, the best way to fix the mistake is to move money from one budget to another. This allows the full amount to stay unchanged.
I use this when I see that there is a category that I over-budgeted and one that I under-budgeted.
If you overspent for a budget during the month, the best way to fix the mistake is simply to reduce your allowed expenses for the same category the next month.
Let’s say you enjoyed more restaurants than you should have this month. In that case, it would make sense to simply do less restaurants the next month.
There is also the possibility that you add more money to a budget without moving it from anywhere else.
I don’t like to use this method as it reduces one important part of your financial health: savings.
What tool do I use?
While browsing the internet, I have seen countless tools to manage a budget and expenses. I have seen complicated tools. I have seen simple tools with a monthly subscription.
Budgeting should be easy to do for anyone and should not cost too much.
I use Google Spreadsheet with a Spreadsheet I designed to be simple to use while also providing great features.
I am making it available to anyone who wants to use it. You can have it for free if you want to try it out. If you think it really helps you move closer to your financial goal, you can buy me a coffee ☺️.