Exploiting my money to reach financial security has always been one of the purposes of my life. When I think about the future, I see myself as a person that enjoys his life entirely, without any money worries. But I am sure I am not the only one.
Many people question themselves on this argument daily, and if you are reading this article, maybe you are doing it too. So how could you reach financial security? What do you need to cut this month? Can you afford a new TV? Can you afford to eat out?
These daily decisions might seem insignificant. Still, they are the difference between those who have organized finances and those who spend their money carelessly.
And since you have to deal with these questions each day of your life, they can trigger your insecurities and become a relevant stress source. To delete them, you need a plan that automates as much as possible your expenses and your savings. This way, you eliminate the possibility of ending the month with no money left, and you can also build a fund for any emergency.
In finance, micro-managing the outcome stream is a concept known as budgeting. So if you want to try, I will explain how I did it and how you can do it likewise.
3 Steps of Building a Budget-Focused Financial Plan
You may have already heard about budgeting, but what is it exactly? A budget is a plan that defines how to use every single dollar you have. And even if creating one is simple, it requires discipline to follow it and achieve financial security.
When I did it for the first time, it was challenging. So I came up with three steps to make it easier.
1 – Define the monthly income
Since I decided I should track all my money, the first thing I did is to calculate how much I gained every month, on average.
It felt natural to make this decision because paychecks have a monthly recurrence. So it is easier to implement a strategy having the same time frame in mind.
Also, a relatively short budgeting periods allow me to change strategy if the current one fails. So I can try many until I find the one that fits better my lifestyle.
2 – Choose the basic Budgeting Rule
Once the average monthly income has been defined, I needed a budgeting rule, so I chose the famous 50/30/20.
If this is your first time doing a budget, the 50/30/20 rule is a strong starting point. According to it, you will use 50% of your income for your Needs, 30% is for your Wants, and 20% for Savings. The Needs category includes housing expenses, food, utilities, health, and transport. The Wants deal with personal care, entertainment, and hobbies. While the Savings comprises emergency savings and investments.
3 – Evolve and Subdivide the Rule
Since budgeting is about limiting useless expenses, it is fundamental to also analyze the out-stream of money. So highlight every recurrent stream you notice, and try to remove it if possible or allocate it into a budget.
For example, if you have a range of monthly subscriptions to different services like Netflix or Spotify, make a budget category for subscriptions. So under the Wants category, you will have 5 out of 30% dedicated to subscriptions.
Also, to soften the impact of higher annual expenses, I manage them as monthly ones. Every time I spot one, I subdivide it into twelve parts and include each into my monthly budget, then put that money aside.
So the main 50/30/20 rule, subdivide your budgets into sub-budgets if you want to micro-manage your money better. For example, I use one budget for food, one for transport, one for insurance, and one for home expenses from my 50% needs. For the wants category instead, I plan a budget for outside meals, one for gifts, one for entertainment, and one for travels. Lastly, for the savings category, I split my money between saving funds and investments.
But not every budget is the same – some of them are cumulative. Usually, when the end of the month comes, everything I did not use goes into my savings. But for some budgets, like travel, gifts, and entertainment, I keep the money to use for months to come. This makes me afford anything that goes beyond my budget.
Disclaimer: Budgeting is Not Easy
When I talk about budgeting, everyone tells me it is hard to micro-manage expenses that perfectly. Most of my friends cannot understand the concept of limiting the out-streams and saving up money for the future, so they spend it all.
What triggers me is that I never said budgeting is easy. On the contrary – it is hard. But it is also one of the main tools for creating wealth. Without budgeting, it will be harder to save money each month in a saving fund or put them into a 10-year investment plan.
So one last thing I suggest is to try to make the budgeting rules as automated as possible.
Many applications can help you with that, but the best I tried is called Wallet. I linked my bank account with this application, so each time I spend money, it categorizes my expenses based on the vendor or previous categorization. Also, it notifies me how much money I have left for that specific budget, so I don’t need to check it every time.
Another application you can try if you are a complete beginner is Satispay (available only in Europe). This one takes a fixed amount of money from your bank account every week, helping you understand the budgeting mindset and how to manage limited money. Then, at the end of each week, it refills your budget from your bank account.
With the help of these two applications, budgeting should be a lot easier, and you could start thinking about investments, saving accounts, and your future wealth.
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