If you want to be good with money, master your personal finances and take control of your financial life, and have a clear plan for your future, retirement, and financial independence, it has to start with a budget. You have to have a clear plan and strategy for where your money goes and how it is spent.
you can do that the old school way which I like, you basically write your expenses in a notebook or you can use excel sheets or even apps, choose whatever comfortable for you.
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Before we start to talk about the steps to create a budget, we have at first to define what’s budgeting and it’s pillars:
It is the process of creating a plan to spend your money and income, lower your money related stress and reach your financial goals
There are 4 major pillars in budgeting: income, spending (needs, wants), saving, investing
Income All the money you earn or get. These sources include your salary and bonuses, pension, and dividends, as well as the money you get as an inheritance or gift.
Spending Where does your money go? This involves necessities like rent or mortgage and food, and non-essentials like going out, hobbies, and whatever you buy simply because you want to.
Saving Money you put aside for future use in a checking or savings account or low-risk money market securities. Investing Typical investments include stocks, bonds, and mutual funds, as well as investments in things like real estate properties or private companies.
Step1: Track your expenses
You can do this backward or forward; this means you can go back to your past expenses in the last months, like in your bank statement or your past bills, and try to calculate how you spend on different things food, bills, housing, transportation, eating out … or you can start by writing down every single expense and track that for a month or more.
After you wrote down all of your spendings, start putting it into categories, first, you start with specific categories like I already said groceries, bills, eating out, rent, then you categorize them into needs, wants, saving, and investing.
Step3: Have a budgeting goal and set rules
After you structure your budget and have a clear image of how your income is distributed, now you should have a goal in your mind to achieve, a budget plan that looks perfect for you, which will help you achieve your financial goals. An example goal on which I encourage everyone to do is to save up to 50% of your income because this will set you free and can make you retire early in just 15 years if you stick to it. Also, you should set rules around spending that means for example you should not spend more than 50% on needs or 20% on wants
One thing I advise you is to start saving minimum 25%, to build your emergency fund at first and save for future investments.
Step4: Stick to it
This is the most curial part because a lot of you start budgeting and like the idea but do not stick to it, or do not stick to the plan and overspend on things you should not. Discipline is the key here, the more discipline you are the faster you achieve your goals, and the less stressed you are.
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