Budgeting for beginners: Easy ways to manage your money

Budgets might seem boring. In reality, though, they are one of the most important tools for growing your wealth and they are easier than you would think to manage.

Very simply, a budget is a roadmap for where your money goes and a way to make your hard-earned income work for you. Budgets assign your money a job, as investment advisory firm Motley Fool explains it, and establish spending limits for expenses so you can use your money well.

For people who use a budget, the New York Times opined, the benefits can be huge. Budgeting can put you on a path toward saving, help you find sources of income leaks, and boost your retirement savings.

Research reported by the Economic Times showed that households that follow a budget save more money than families that haven’t laid down rules.

And for the tech-savvy, a survey by Standard Chartered Bank found that the emerging affluent who actively use digital tools save 8 per cent more than those who use digital tools less or not at all.

The reason for these results is that using a budget helps you focus on what you can afford and gives you a realistic look at how you really use your money.

The concept behind a budget is straightforward. By figuring out your income and expenses, and creating a plan for spending your money, you can figure out whether you have enough to do the things you want. If you don't have enough, you can use the budget to reprioritise your spending and focus on the things that matter most.

PREPARING AND RECORDING A BUDGET

While some people do not use a budget because they think it is too much of a hassle and too restrictive, preparing a budget is straightforward and there are plenty of ways to do it.

Four steps are essential.

First, calculate your total income. Gather your bank statements, payslip and other information showing what money is coming in.

Next, identify your expenses. Create a list of monthly expenses and split them into fixed expenses such as your mortgage or insurance payments and variable expense such as dining out or taxi fare.

The MoneySmart Budget Planner from Australia has a list that can help you make sure you include everything. Tracking your expenses for several months can give you a more complete picture of how much you’re actually spending.

Then, set your financial goals. You may want to buy a home, go on a holiday, pay tuition, save for retirement or buy clothes. Whatever your goals are, make sure they are “SMART” — specific, measurable, achievable, realistic and time-bound — and not just wishful thinking. The more specific they are, the more likely you are to take steps to achieve them.

Finally, put all this information together into a budget that includes your income, expenses, and money for your goals. If your expenses exceed your income, reallocate your money and spend less in some areas.

Then, input your expenses every time you pay for something. If you’re using paper, write it down. If you’re using an application, enter it in the app with the amount and category.

While it takes a bit of effort in the beginning, you’ll soon almost be on autopilot.

You should still check bank statements once a month, so you can add in inter-bank Giro payments or other expenses that you’ve left out.

It’s possible to use a simple paper spreadsheet for your budget, with sections for income, expenses and money for goals. Many people use an app, though, because it makes budgeting easier and sends reminders.

Toshl, for instance, is an app that allows you to set up a budget by inputting your income and expenses, then track your spending against your budget. A tutorial shows how to do everything.

Another app, Wally, similarly uses your input to show you what comes in, what goes out, what you saved, and where the gaps are. It also has tools to help you understand where your money goes, and make changes.

KEEPING TRACK OF PROGRESS

The most important part comes next, because build-it-and-forget-it won’t help at all.

Once you have created your budget, use it to understand how you’re using your money, how to keep your finances on track, and where to make changes.

Equally or more important, as e-learning portal Khan Academy suggests in its personal finance section, is reviewing your budget regularly to make sure you stay on track. You should check to see whether your income is what you expect, and whether you’re overspending.

If you need to make changes, you can shift your expenses or figure out a side gig to get more income.

The goal isn’t to track every cent or balance your cheque book every day. Budgeting also doesn’t mean scrimping and making your life unbearable. Instead, it is knowing how much of your money goes towards savings, bills, shopping, and other needs.

You can use the budget to shift your priorities, make compromises and adjust your spending to meet your goal.

While it takes some effort, using a budget is the best way to achieve your goals, whether they be taking the vacation you want or retiring early.