7 things to consider while setting a budget

Setting a budget sounds complicated, but it is the backbone for cautious spending. You will have to track each penny to ensure you have not burst out of your budget. A budget sets a spending limit that you cannot cross under any circumstance.

Before you start budgeting, you should consider the following factors:

• Know what is coming in

Before budgeting, you must know how much money you have to work with. It includes your paycheque, side gig income, and the extra money you will make by selling your outdated furniture. Without knowing your total income, you cannot successfully make your budget work.

Use a budgeting app so that all transactions are recorded in one place. You will be able to better track your expenses. Purchases made through a credit card will have to be recorded manually to avoid being under the delusion that you can spend that money as it is yet in your pocket.

• Track your expenses

 Tracking does not mean recording all transactions and adding up the total sum to know how much you have spent. It rather means identifying which category eats up the largest proportion of money and figuring out ways to pull in the horns.

The budgeting app helps you record all transactions under specific categories such as food, travel, clothes and the like. At the end of the month, you can add up the sum under each category to find out how much money you have already spent on them.

Then, you should see further categorisation. For instance, food can be divided into groceries and coffee. Now, see if coffee is to blame for higher spending on your food category. There is no point in tracking your expenses unless you trim them down.

Come up with some ideas to lower your expenses. It will help you retain more cash in your pocket.

• You can cut down on coffee. Home-made coffee is much cheaper.
• Buy groceries in bulk, provided they do not go off soon.
• Buy generic products instead of premium products.

Keep your expenses as minimal as possible to ensure that you stay within your budget.

• Plan for the unforeseen

Life comes at you fast. This moment, you find yourself in the black, and the next moment, you find yourself in the red. Unforeseen expenses can catch you off guard, and it can be problematic when your savings are not enough. Your car may start acting up, or your laptop may go out of action. Your budget will, of course, have no scope to cover these expenses. Undoubtedly, you will have to fall back on your emergency cushion, but what if it is not enough?

You can take out a loan to meet these expenses, but only if you are sure about your repaying capacity are loans recommended. There is a huge risk of rolling over a loan. As a result, you will end up with debt consolidation loans for bad credit in the UK from a direct lender.

You can avoid this headache by planning for unforeseen expenses. You should build an emergency cushion which has the scope to cover three months’ worth of living costs. It is the minimum size of an emergency corpus. It is necessary because you may lose your job at any time. You must have sufficient cash to tide over unless you land a new job.

• Save for planned expenses

An emergency cushion is meant to meet your expenses only. When it comes to saving for planned expenses such as deposit size for your car, vacation, wedding, or honeymoon, you should open a separate savings account for these expenses.

Make sure you keep contributing a fixed sum of money every month. Pay yourself first so you do not use up money that you are supposed to set aside for unforeseen and planned expenses. To meet some expenses, you will need to rely on loans as well. For instance, car finance with bad credit from a direct lender will be available at lower interest rates if you arrange a bigger deposit size.

• Set financial goals

Goals will keep you motivated to save money. Set long-term goals as well, but you do not need to achieve all short-term goals at the same time. You should aim to achieve one small goal at a time and alongside keep setting aside money for long-term goals such as the down payment for your mortgage.

Short-term goals include paying off debt, building an emergency cushion, saving for a vacation and the like. However, debt settlement should be the priority. After the settlement of your debts, you should think about other goals, including emergency savings.

• Fine-tune your budget

The aim of a budget is to help you reduce your expenses. You cannot be absolutely certain about your monthly expenses. There will be moments when you will have to reluctantly spend. You can adjust that money by fine-tuning your budget. You will either adjust that money in your next month’s budget or chip away at other expenses for the same month. Budgets do not have to be set in stone. They have been designed to help you manage your expenses despite difficulties.

• Do not be a miser

Budgeting does not mean spending like a miser. You can still enjoy things you love. Pursuing hobbies and treating yourself should not be off your spending list. You do not need to overdo it, but once in a while, it is fine. Budgeting does not mean that you should restrict yourself from doing things you enjoy.

The final word

Budgeting is the key to money management. It will help you track your expenses. After gaining insight into where your money is going, you can come up with a strategy to reduce them. The lower the expenses, the higher the savings will be. Use a budgeting app and keep fine-tuning your budget from time to time.