Budgeting for Dummies: How to Get a Grip on Your Finances

Those two words, "establishing a budget," sure are going to make every hair of even the most financially stable among us stand on its head. But here's the secret: budgeting is not all about denying yourself from your wants, or number crunching until it hurts. That is, in control of one's finances, cognizant of exactly what's going on with that hard-earned cash-being able to spend one's money consciously en route to his goals. Whether one lives paycheck to paycheck or just because getting financially optimized is on the cards, this shall be the budget to guide one through a safer and stress-free future.

How-to, take one through line by line, through must-have components in developing a budget that works in their favor; this is not shaving fat. It is all about how to make money work harder and wiser. So grab yourself that cup of coffee, get cozy, and let's dive head-first into the ultimate art of budgeting.

Why Budgeting Matters: It Is the Foundation of Freedom

Before the how, let me talk to the why: For so many of us, with the mere mention of budgeting, some imagery of deprivation and sacrifice in the shadow of the mind makes its appearance. What I mean is, in real life, at the end of it all, you do get to spend money earned on things that mean something in your life while preparing you for that wind blowing through your way.

If you will, financial freedom stands on that very ground. An individual will most definitely find himself losing track of his or her spending so easily and sliding deep into debts or even missing those great opportunities they might have saved for and invested in-no doubt. On the contrary, it brings clarity, and with clarity comes control-surely you know where your money goes, and an informed choice in the active apportioning of it can really be made in ways consistent with your goals and values.

1. Account for income and expenses.

Of course, one sure thing to do, in wanting to come up with a budget, is to first get a realistic stance or orientation on your current financial state. You would want to build a house and for that, you've got to have some sort of foundation; you cannot do it without knowing where your money is coming from and where it is going.

First, research it and take note of all the different sources through which income will arrive. It could be a basic salary, freelance work, side gigs, rent one gets, or however one is sure money will be coming their way and thus into the account. As a matter of fact, one has to note everything down, however small it may turn out to be. Because therein, you get to know the extent that you can spend, save, or invest.

Expenses: Know What's Going Out

Of course, the next thing to be determined are the expenses. That may prove to be a little more difficult, as it will involve some more work on your part at least in the beginning, if you've never tracked or kept score of how much you spend. So get out pen, paper, and start listing your fixed expenses-those bills that you just can't get around, every month. Name your rent or mortgage, utilities, insurance premiums, loan payments, etc.

First, fill in what the fixed expenses are, then determine what the variable expenses will be. Examples of such things in a monthly budget include things like groceries, meal spending due to dining out, entertainment, and wear and tear on your car. These variables change and hence are a bit more difficult to track month over month.

Most budgeting applications make this an easy option. Alternatively, you could analogize this: just pull up your account statements for the past few months. You want a good big picture of what you spent your money on.

Step 2: Categorize Your Expenses

Now that you understand your income and expenses, categorizing your spending would be the next sensible thing. Probably, categorization is an important insight, as it would reveal what category gobbled up how much money in life, or what are those places where, if need be, the cut can be taken.

The Must-Haves: Basics

First let me explain what necessities really are-those expenses without which one just can't survive, paying month in and month out. Usually, these would include house payment, utilities, food, transportation, and health. These will be first to enter into your budget because they represent those need-to-haves that keep you alive literally.

The Nice to Haves - Non-Essentials

List below all of your non-essentials. That's a funny word, but this category involves those things that make life just a bit more fun but in essence would not truly make life impossible. Going out to eat, entertainment, shopping, hobbies, and the like are examples of this category. Just as well, even though not indispensable, these things play a very important role as well. That is where the balancing part comes in. You enjoy your life but save a little for the future.

Savings and Repayment: Investment

Do not also forget to budget in savings and debt repayment. These could be emergency fund savings, retirement account saving, or debt payment on credit cards. Above categories are important in that they show which one a person is investing in future security with dollars in firm actions.

Step 3: Set Financial Goals

By now you will have managed to make sense of what you earn, your expenses and how you are spending. It is now time to set some financial goals. In most instances this will now help in guiding the budget and give the driving force for adhering to the plan.

 Immediate: Short Term

The short-term goals can be any such thing you'd want to do in the forthcoming year or something like that. Maybe you want to save a little money to go on some vacation later, build up your emergency fund, or wipe out your credit cards. Such goals should be specific, measurable, and attainable in a short time.

That means you concretize it by saying, for instance, "I want to have savings of as much as $1,000 for emergency funds in the next six months," instead of saying, "I will save money." Now you've derived a particular figure to race toward, so it is so much easier. 

The Big Picture: Goals in the Long Run

The long-term goals may take several years, running into decades, to be realized. Such examples include retirement savings, purchase of a house, and paying for your child's education. Long-term goals require more care in planning and patience. Meanwhile, they are just so important and imperative in making one secure financially in the future.

This is the step you need to take concerning setting your long-term goals: consider breaking them down into smaller milestones. Make use of the target above when one wants to save $50,000 in five years for a down payment on a house—the annual savings is $10,000. Doing it in this manner signifies that your long-term goals have not been overthrown but actually remain achievable.

Step 4: Budget Your Plan

Next after goals, is budgeting. This is where the rubber hits the road - this is where you are actually going to state exactly how you plan on using your income by funding your expenses and goals.

The 50/30/20 Rule: A Simple Framework

Your money may be divided in many ways between your many expenses, but one popular method has been called the 50/30/20 rule. You should spend:

50 percent on necessities
30% for discretionary spending
20% for savings and debt payoff

Good advice—and it's so plain to see. Of course, it goes without saying: You would overtly make this consideration based upon your situation and priorities. If being debt-free is the number one thing in your life, of course, it makes more sense that you would use more than 20 percent on debt repayment.

Zero-Based Budgeting: Finding a Job for Each Dollar

That is another fine way to budget-in other words, that is what they refer to as zero-based budgeting. You give a job to every single dollar you own: some on your expenses, some to save, and some to offset debts. It's just about making sure one has a place for one's money and that expenses reflect one's goals.

Zero-based budgeting can be a bit voluminous on the other hand, it's one heck of a great way to ensure everything at your disposal gets into action. It comes quite in handy, in simpler words for a person who wants to save or return debt with maximum productivity within the shortest time frame possible.

 Step 5: Track Your Progress and Make Adjustments

While it is quite easy laying down a budget, the bottom line comes in terms of how one can stick to it. Honestly, a budget will only be said to be functional when one adopts a follow-up approach towards measuring his or her progress and doing regular adjustments.

 Track Expenses

The best thing about adhering to a budget is that it makes one pay attention to what they spend. It is not about obsessing over every single dime, but noting the trend of spending habits concerning falling in line with one's plan.".

Go through where you're spending money on a normal cycle-say, weekly-then edit your budget to make the appropriate changes. Where are you overspending? Cut back in that area then take that money and shift it over to where you want or need to be spending it.

Review and Adjust Your Budget Monthly

Review your budget at the end of every month. Are your savings goals on target? Are you able to work out the plan with regard to expenditures? Is anything done better?

Take this review and make the changes in your budget. Life is just not predictable, and your financial situation could change from month to month. The trick lies in being flexible and adjusting your budget accordingly.

Step 6: Emergency Fund

An emergency fund is an insurance cash cushion that will let you pay for those unexpected expenses-medical bills, car repairs, loss of job-while maintaining your budget without going into debt.

How Much Should You Save

A general rule of thumb is three to six months equivalent to your living expenses saved in your Emergency Fund. For most people, this would be a huge amount, but that is just the type of cushion that will give you peace of mind and a firm financial ground from which to avoid most of what's happening in the United States nowadays.

If this is the most that you can afford, set aside a little. Save what you can from month to month until you reach your goal. However small the amount of money saved therein, an emergency account is always better than no account at all.

Where to Keep an Emergency Fund

It should be highly accessible, so your emergency fund can be used for anything that life may throw at you. At the same time, though, it mustn't be that type of accessible that you will spend this money on non-emergencies. High-yield saving is one option since it's highly accessible, and you actually can earn something on it.

Step 7: Stay Motivated-Commemorate Your Success

Budgeting is never that easy, but it would definitely mean a lot to one in order to stay motivated-to commemorate such steps taken towards progress one after another.

Find Your Why

The best ways to continue your motivation are going to always relate to keeping your financial goals right in front of you. Why are you budgeting? What is it that you want to achieve?