Budgeting made easy

Follow these steps to ensure you reach your financial goals and live the life you imagined

Written by Exequiel Octavio Bertaina

As always, you will have to live within your means if you don’t want to end up declaring bankruptcy and ruin your credit rating. That’s why it’s critical that you create a proper budget for yourself in order to meet your needs and achieve your long term financial goals.

The best approach to take is to first establish your financial goals. This will give you the opportunity to independently finance future spending, while avoiding financial stress once you’ve enjoyed your vacation or purchase.

You must begin by estimating your available income. It’s best to measure your income on a monthly basis, since many payments, such as phone bills and car insurance payments, are due each month. Note that gifts, bonuses and unexpected income should not be included in your budget, since they are not considered a reliable source of income.

Once you’ve established your monthly income, create a list of monthly expenses based on two categories: fixed and variable expenses. Fixed expenses are costs that persist over long periods of time, such as monthly payments for your cell phone, hydro, and insurance. Note that fixed expenses usually do not vary on a monthly basis.

Variable expenses, on the other hand, will differ from month to month because they refer to how you spend your money in terms of entertainment, gasoline, red-bull energy drinks for exam-sessions, etc. These two categories are fundamental and key to building a proper budget, so please be diligent and honest when calculating your expenses!

Once you’ve determined both your monthly income and expenses, it’s time to crunch the numbers and conclude whether you’re making a surplus, are breaking even or sinking in red ink. If you’re making a surplus; that is, if your income is exceeding your spending, it would be wise to open a savings account or make investments for future planned activities or needs.

If you break-even or almost break even, a situation where your income matches your spending, you should decrease your variable spending with the aim of increasing your surplus. This will enable you to save for future needs or emergencies.

If you’re sinking in red ink, meaning your expenditure surpasses your income, then you’re most likely living with some form of credit, whether it be a financial institution, credit card company or your parents. In this case, fundamental changes to your fixed and variable expenses are required. You will have to scale back on the amount of red-bull drinks you consume or restaurants you frequent; basically, limit your spending on non essential items, such as clothing and entertainment. You may also consider reducing your fixed expenses by changing you current plans for less expensive ones.

Many people will tell you that breaking even is fine, but it isn’t. Your income should always exceed your variable and fixed expenses combined in order for you to be able to save money. It is only through saving that you will be able to accomplish your ultimate financial goals, whether you want to invest, vacation in the Caribbean or Europe, or gift yourself with a shiny luxury car.

Also, when budgeting, make sure to have emergency funds and savings available to insure long-term financial security. I’d suggest that you have least have 3 months worth of variable and fix expenses combined available to you at all times. It’s critical that you have a cushion in case you lose your main source of income after being fired, suffering an injury, etc.

It is imperative that you review your financial progress and adjust your budget accordingly. This will ensure that your financial goals will be attained within the desired time-frame. This strategy is not limited to revising your budget allocations, but also revising your goals, if required.

Here are some important things to know about successful budgeting:

• A good budget is always well planned; it takes time and effort to be properly prepared.
• Your goals should be very realistic; if you have a moderate income, don’t expect to save enough money for a lavish vacation or an expensive car very quickly
• A budget is not intended to prevent you from enjoying life but to help you achieve your long term financial goals
• A budget should be flexible; you should be able to adjust your budget in relation to unforeseen expenses and fluctuations in your cost of living
• Last but not least, your budget should be clearly communicated so that others are aware of your spending plans; this ensures they won’t force you to overspend in the long-run

Remember, a budget is intended to help you make better use of your money, not to reduce your enjoyment of life.

ARB Team
Arbitrage Magazine
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