The secrets of budgeting
Budgeting helps you to save the money you normally would spend on unnecessary things. By exactly showing you what you spend your money on. This is extremely helpful for you if you often struggle with having enough money for the rest of the month. And it will help you if having more from your hard-earned money is something you always wanted to achieve. In this post, I will show you why budgeting is more important than you think. You will understand why you should budget and how you can budget your money. By showing you exactly what is necessary for budgeting. And I will also give you suggestions on what you can do with the then saved money.
Why you should budget
If you budget with your money you can reduce your costs of living. By spending only money on things you actually need. Therefore you can ensure that you have enough money for everything you need. Or you can be sure to have money left at the end of the month that you can invest.
Additionally reducing overspending is a part of budgeting. Because normally you don’t want to spend money on clothes if you already have enough. But if you only look at the new clothes you could buy it is easy to forget that you don’t need them.
If you see that you only wanted to spend 50$ on clothes this month. But the new jacket cost more, you know directly that you can’t afford it. And when you are home you probably realize that you don’t even need it. And you can be happy you didn’t spend the money.
The key to do so is first to know exactly what you spend your money on. And then decide if it is worth it. Because if you don’t know exactly how much money you spend on food delivery services last month. You can’t be sure if your money was spent well.
Budgeting can help you with that by showing with hard numbers. And that cooking for yourself is so much cheaper than ordering your food. Also if you have this extended knowledge you can decide whether you want to order food today again or just cook something.
Most people don’t know what they spend their money on and most people aren’t rich. This is because they rather spend their money on the next unnecessary gadget online. And ignore how much they have already spent on stuff they don’t really need.
How to budget
Set your budget
The first step is to estimate your earnings and spendings for a single month. Therefore you have to build categories that make sense for you personally. If you are working nine to five and get a consistent income from one single source every month You only have one category for your income. If you are a freelancer and have multiple streams of income. It would make sense for you to have one category per stream of income. The same with your spendings. If you don’t spend that much on clothes and going out you can put both into one category. If you spend most of your money on these things you should separate them. To improve your system so that you get a more detailed look.
When you have estimated the average of your earnings and spending per month you now maybe want to adjust something before you get to the next step. If you have one category in which you think you have spent too much, set yourself a realistic goal that you want to reach in the next month.
When you have your budget set you need to stick to that budget. If you made a significant change in what you wanted to spend and your new budget, think about methods of how you can reduce your costs in this category. If you normally spend a lot on food but you now want to quit it you have to analyze yourself first.
Why do I spend so much on food? In this step, you need to overthink where you spend the most money on in this category. For food, it could be eating out with friends which is way more expensive than just cooking by yourself. So now you know where you spend the most money on in this specific category, and you need to ask yourself: “How can I change this?”.
For our example, you may think that cooking alone at home is way more boring than eating out with friends. So you need a possible way to keep the fun with your friends and save nevertheless a bit of money. Here you can, for example, ask your friends if they want to come over to your place the next time and bring a bit of food so you can cook together. Or you can establish a system where you cook for everyone on one weekend and someone else on the next until everyone invited everyone and it is your turn again.
There are plenty of options, just be creative. To make sure that you stick to the budget you set yourself, you have to establish a system.
Establish a system
There are many options but at first, it is important whether you pay with card or cash. If you rather pay with a credit card, it is probably easier because you can see everything online nowadays and there are options like apps or multiple bank accounts. If you rather pay with cash you have to organize yourself so that you know exactly for what you how much you paid.
But it is very important that your system is automated or you should make sure that doing it becomes your habit. Because if you once set things up right then you don’t have to worry about it again.
And secondly, your system must prevent you from spending more than your set budget. To do so, one of the tricks that the system uses ist to transfer every month a fixed amount on one card which you only use for buying food and groceries.
If you have established your system you can just let it run and don’t have to worry about it. The only thing to have to do is look at it at the end of the month. Because your goal is to spend less money than your set budget so you should have money left in each category. You have to determine now how much you exactly have left to adjust your budget in the case that you had way too little money or way too much.
To do this, you must keep tracking your budget. Therefore you need a budget plan to include all your set goals and actual spendings. If you want to know exactly how to create this, you should read this article:
If you have done so you can now go on to the probably best step of the whole system, which is investing the money you have left. Because you now know how much money you exactly need for each month and how much you earn. You can also determine how much you will have left if you stick to your set budget. And to help you to not spend more than you want, it is best if you automatically invest the money that you would have left at the end of the month in the first place.
What to do with your money
Set a goal
But now there is the great question of where to invest. First, you should overthink how much you want to save just to have a goal. This question is too huge to cover it in this article. To set yourself a goal and make a plan on how to achieve it is very important for your motivation.
Create an emergancy fund
But the money you save first isn’t for investing, it is for your emergency fund. Now you might ask yourself why you shouldn’t invest this money in the first place. Because there could be an unplanned emergency for which you need the liquid money.
If you, for example, lost your job you would still need to cover expenses like rent and food. And if this happened and you don’t have any money put aside you would have a huge problem. Your emergency fund should be about 3 to 6 monthly incomes.
Pay off debts
After you have set up your emergency fund you are now ready to pay off your debts because if you pay your debts you get kind of a guaranteed yield which is pretty good. But why is this the case?
The effect comes from the interest you have to pay for your debts. And you don’t have to pay this interest if you don’t have any debts. Therefore the interest you don’t have to pay is kind of the yield of your capital that you use to pay off your debts, cool right? Especially if you consider that you can get 10% and more of the guaranteed yield nowadays.
If you want to know more about how to pay off your debts, you should read this article too:
If you follow through all of this or if you don’t have any debts, you can start to invest now.
But first I want to gratulate you on this because more than 57% of American households actually have credit card debts, so congrats for being none of those! To invest your money properly is easier than most people think it is. The world economy normally goes up by about 7% per year. That means you double your money every ten years!
For example, if you invest 10.000$ now you would have 20K in 10 years 40K in 20 years, 80K in 30 years and 160K in 40 years. Impressive right? But to really invest your money properly I suggest doing research first.
A good start for research on how to invest is to read this article:
Thanks for reading!
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