Not everyone loves sticking to their budget, but it’s one of those things in life that if you can master it, you can set yourself up for a stable financial future. Without good budgeting skills, you’ll never know where your money is going or how to improve your financial status. But how do you know if you’ve set a good budget? Fortunately, there are a few basic elements you can incorporate into your budget to help you get on the right track.
What are the benefits of setting a budget?
Setting a budget can benefit you in numerous ways, which can include:
- It gives you a clear perspective of your financial health and ability. It’s so easy to overspend when you think you have the finances. With a budget, you’ll know exactly what you can afford
- It provides you with the right path to achieving your financial goals, granted that it’s set correctly. Whether you’re saving to buy a house or for your retirement, a budget helps you allocate your financial resources appropriately to relevant expenses and savings.
- It decreases your risk of making costly financial mistakes. If you spend within your budget, you won’t make purchases that you can’t afford, putting you in a financially difficult spot.
What are the five elements of a good budget?
The first thing you need to consider is that every budget might look different when it comes to the nitty-gritty details and amounts, but they essentially all have the same fundamental elements. Here are five elements that are essential to a good budget:
1. Listing your total income
When you start setting your budget, the first thing you want to do is either calculate your total income or your total expenses. We generally start with our income. You need to jot down your income streams and the income that comes from each of them and then tally them up together, giving you your total income. You might know the total of your head, but we still recommend recording all your income sources to make your income more trackable.
2. Listing your set expenses
Expenses work in very much the same way as income. Once you’ve listed your income, you’ll want to list your fixed expenses. Set or fixed expenses are those that are reoccurring every month, they don’t change, and generally need to be paid by a certain date each month. For example, your house mortgage, rent, medical insurance, etc, are all fixed expenses. Add paying off debt to these, to so it’s always a priority.
Add all your expenses together, and you’ll come up with a total that should ideally be below your salary. If it’s above, then you need to consider cutting something out that’s the least important fixed expense if possible. Then subtract your expenses from your income, and you’ll know what you have left over.
3. Paying off debt
Debt is an important aspect of your budget. If you have debt, your goal should be to clear this up as soon as possible. Having debt isn’t necessarily bad. In many situations, you would need to prove that your credit status is good enough to take out a loan or make a purchase. However, with debt usually comes high interest rates which could cripple you financially if left alone. Thus, debt should be included as a priority in your fixed expenses so it’s paid off promptly. If possible, you may even want to include extra to pay it off sooner.
4. Unplanned expenses
Unplanned expenses are basically anything else that you didn’t plan on spending money on. For example, if you want to go to the movies or have supper at a restaurant, these would be unplanned expenses. They don’t fall exactly into your budget, but you still have many put aside for them. This part of your budget might have another name, too. For example, you might want to call it an entertainment budget or a free-spending budget.
5. Savings
Finally, you need to include savings. If possible, it’s recommended that you try to put at least 20% of your salary into savings every month. This should be over and above putting money into retirement savings. Having an emergency fund is vital for everyone. You never know when an accident could happen that could put you in financial distress. Having savings ensures that you’re prepared for these emergencies.
Need help managing your budget?
For some people, budgeting simply isn’t their strong point, but it’s still an essential life skill. Should you relate to this statement, never fear because the solution could simply be that you need help setting a budget. Solace Financial is one of the best brokerages in Australia and has a strong team of certified financial planners who are well-equipped to help and educate you about budgeting and so much more. They can not only help you manage your day-to-day finances better but will also assist with building wealth for the future.
Final Thoughts
To sum things up, a good budget needs to include your income, set expenses, unplanned expenses, debt, and savings. How you prioritise these is up to you. However, we would recommend getting rid of debt and saving as some of the most important things to consider. While there are more components to a budget, these five aspects set a good foundation for you to work off of. Good luck!
