There are countless reasons for budgeting. And you’re no different, you need a budget for pretty much anything.
Much like the reasons for budgeting, there are benefits of budgeting. The basic idea is to set aside a portion of your earnings each month for something else. It can be for investment so your money can bring in more money for you, establish spending limits, or simply saving enough money for specific reasons.
For many beginners, budgeting is a tough job. Sometimes it’s difficult to not spend money that you have earned. Some other times you don’t know how much money you should spend each month.
In this article, I want to show you some basic tips for budgeting that you can use for both business and personal expenses. The goal here is to make you budget your money better.
Determine the reason for budgeting
This is important, budgeting for the sake of budgeting just makes it harder. You need a reason or goal to keep you going.
If your reason for budgeting is for something long term, it’s ideal to not set aside too much money. So, you can use what you have right now for something else. That’s different from budgeting to minimize spending. If that’s the reason, then you can’t spend too much money each month.
Other reasons are reducing overspending on specific areas, getting out of debt, and investment. Never underestimate goals when it comes to budgeting. Having a clear set of goals has been proven to make the process of budgeting easier and more likely to succeed.
Follow the rule of thumb for budgeting
This rule was invented by Elizabeth Warren and it says 50/30/20. 50% for ‘needs’ such as groceries, housing, health insurance, business expenses, and car payment. 30% for ‘wants’ such as shopping, hobbies, and other luxuries. Last 20% for savings or investments.
The rules should be simple enough for everyone to follow. And should be able to help your budgeting for both business and personal expenses.
The first priority should be your needs, which is 50%. Figure out how much you should spend on things that you need each month and always remember that your budget is 50% of your income. It’s easy to mistake needs for wants, therefore you should think carefully when listing your spending for needs.
Don’t be afraid of wants. Spending money on things that you like is great for your mind. But of course, everyone is different. Some need a lot of things to be happy, while others don’t need much. If your budget on wants is less than 30% and you’re happy with it, you can put more budget on other things.
20% of income for savings is crucial for your financial situation. 20% should be the minimum you can spare for savings.
Calculate your after-tax income
It’s easy to overestimate how much you earn when you don’t calculate your tax beforehand. Your after-tax income is final and should be your reference for budgeting. Taxes such as state tax, local tax, insurance, income tax, and anything else.
For employees who earn regular and steady paychecks should be easy to calculate their after-tax income. Also, if you have automatic deductions on your paycheck, you can add them back in.
For self-employed people, your after-tax income is gross income minus business expenses. These business expenses cover travel costs (see mileage deduction rules), computer or laptop, and the amount you put aside for taxes.
Running a business requires research and research isn’t free. A growing business needs to set a budget for research. With a clear budget, your research won’t get disturbed by other unexpected expenses.
Calculate your revenue
Obviously, you should always calculate how much money you generate from your business monthly, quarterly, and yearly. It could be fatal for any businesses to not calculate their revenue since it often causes overspending. For the optimal result, make sure that the calculated revenue is as accurate as possible.
Predict your cash flow for the next 12 months
Money coming in and out of your business should be recorded and calculated. And to make sure that nothing is overlooked, you should create a budget based on your predicted cash flow over 12 months. This way you can establish how much money you can spend each month and avoid overspending.
Combine these tips for better budgeting
Now, these are some of the common tips for budgeting both of your professional and personal expenses. There are of course other tips that you can learn and follow, but you should start with these.