Introduction
One of the greatest first steps to financial freedom is learning how to create a budget. It informs your decisions on what to spend. Creating a budget also helps you to make the right financial changes with confidence.
You can actually plan your wealth-building strategy. All this is great, however, it doesn’t matter if you don’t know how to create one. Let’s go through the steps of creating a budget.
Be Honest
It may sound cheesy but, honesty is the first and most important part of creating a budget. We lie to ourselves especially when it comes to our money.
You need to be truthful with yourself in every stage of this process. There’s no place to hide. If you don’t tell the truth to yourself, you will be cheating yourself and it will not work for you.
What if you spend $100 a month going to Cinnabon? You only record that you spend $50 per month, to hide your guilty pleasure. This will actually hurt you.
Your financial numbers will be off and you will be conditioned to spend without any structure in this area. That means you could very well be spending more than $100 whenever you feel like it.
Since you didn’t give your desires parameters to stay within, you’re vulnerable to overspending in that area.
You have to be honest about what you are actually spending, regardless of how embarrassed you may be. Don’t cover up your spending habits. Neither should you try to defend purchases and expenses that you can truly do without.
Tracking
The first couple of days to week, spend normally and record. Do not change your spending behaviors just because you know you are recording.
As we previously discussed, being honest gives you the best chance at making an accurate budget. I want you to fight the urge to fudge the numbers.
Again, it doesn’t help you if you are manipulating the results just because you know you’re monitoring you’re spending. If you normally spend $50 on Uber rides for the week, don’t change your behavior.
Record exactly what you are doing regardless of whether it is right or wrong. This will give you a baseline for where you are financially. At the end of the period read what you have recorded.
If you are true to yourself you will have seen that even before you finished the week you will see some areas that you definitely need to end most importantly want to change.
If you normally spend $50 on Uber rides for the week, don’t change your behavior.
Research
I’m sorry, it doesn’t get easier. This is where you look through your accounts and jog your memory to find how much you are spending on what.
For some people this means looking at bills and statements. While we usually throw these away, this time taking a look will show you how much you are actually spending on these services. You can look through your:
- Bank apps
- Receipts
- Statements
- Bills
- Online accounts
to discover the details of what you are actually spending. Research also includes the act of finding every area of income.
Some areas where most people spend their money are:
- Utilities
- Housing
- Healthcare
- Insurance
- Food
- Property taxes
- Transportation
- Gas
- Debt payments
- Entertainment
- Saving
- Travel expenses
- Car payment
- Cellphone
- Mortgage
- Pets
- Retirement
- Clothing
- Emergency fund
- Gifts
- HOA fees
- Memberships and subscriptions
- Oil change
- Cable
Whether you believe it or not, the average person gets a lot of money from sources other than their jobs. Jog your memory so you don’t leave anything off the table.
The actual budget document will be a result of you reporting what you have researched. After scouring all of your bills and statements, you will write the report of what you’re noticing.
This is the beginning of your budget.
Finalizing
As stated earlier, when you create your budget, it will be in its raw form. It’s kind of like trying to take a picture before you get the makeover.
You won’t really want to take the picture. Still, it will be a necessary tool in guiding how and what is improved in your makeover.
Your budget will help you to get your credit card expenses and debt under control. In turn, you will be finalizing your budget.
Following
I believe following the budget is the hardest part. This is where you have to commit to doing the right things. The challenge of following the budget is sticking to this binary outcome of either following or disobeying your budget.
Now you have a choice where before the choice you had was whatever you wanted. This means that before you had to choose whether you were going to follow your budget or not, you were the boss and you chose how and when you spent your money.
Now you have to follow the plan to have success. Will you be tempted? Absolutely! No one said it would be easy. It’s definitely worth it, though.
Conclusion
You learned the different steps of building a financial plan. Take the first step. Create a budget that captures your entire money inflow and outflow in an accurate snapshot. The next step is learning how to use that money that is left over after you create your budget to build wealth. What is your most questionable expense?
