At Fivent, we believe that budgeting is one of the most important components of a strong financial foundation. Budgeting is important because it is the means to achieve what you are working on. It is a tool that used properly can help pay a mortgage, invest for retirement, make a great trip a reality, etc.
A good budget should get you where you want to go. The process of planning a budget allows you to prioritize your goals based on when you want to achieve them. By managing your finances with a budget, you can improve the likelihood of achieving your financial goals within the desired time frame. So, before we get into the “how” of budgeting, take some time to think about the “why” of your goals and the “when” you want to achieve them. Ask yourself the following.
- What are your priorities?
- What are you working for?
- What are your deadlines?
Knowing the answers to these questions will help you stay motivated and stick to your budget.
How to make a budget?
Creating a good budget is easy, don’t make it too complicated.
First, put your numbers in order. To do this, answer these four questions:
- What are your financial goals?
- How much is your income?
- How much are your fixed and variable monthly expenses?
- How much are your non-monthly expenses?
The strategy I recommend for budgeting is called “The Flexible Number Strategy.” It requires a bit of calculation upfront, but it eventually makes your life easier because it helps you prioritize. After you’ve allocated part of your income to your financial goals, fixed expenses, and non-monthly expenses, you can spend your remaining income as you wish.
In general, the strategy is quite simple: subtract from your income after taxes your contributions to your financial goals (such as saving for your emergency fund), your fixed expenses (such as rent), and your non-monthly expenses (such as payment of annual insurance policies). The surplus you have left represents the amount available for your variable expenses during the month. That surplus is your flexible number.
You can use your flexible number to cover your other expenses or do whatever you want. And you can do it without remorse because you have already taken care of fulfilling your commitments and laying the foundations for a better future.
Example of a monthly budget
Plan your budget so that it takes you where you want to go. If you want a step-by-step guide on how to budget well, visit www.fivent.com and download our free guide to budgeting.