Introduction
Budgeting is a fundamental financial management tool used to plan, track, and control income and expenses. Budgeting is essential for achieving financial goals, managing money effectively, and making informed financial decisions.
Lesson 1: Definition of Budgeting
A budget acts as a roadmap, guiding a person or a business in managing their finances.
Lesson 2: The Importance of Budgeting
If you want to achieve financial stability and security, then developing the skill of budgeting is very important.
Budgeting can help you to:
- (a) control spending and avoid debt,
- (b) save money for short-term and long-term goals, (for example, having an emergency fund, saving for a vacation, and putting money away for your retirement allowance), and
- (c) make informed financial decisions by allocating money resources efficiently.
Business owners can benefit from budgeting by:
- (a) forecasting revenue & expenses,
- (b) planning for investments, and
- (c) monitoring financial performance and profitability.
Lesson 3: The 3 Basic Components of a Budget
If you think of budgeting as a machine, its job would be to allocate income to cover expenses, while also ensuring that your savings goals are met. To do so, the machine would need 3 basic components: (1) income, (2) expenses, and (3) savings.
(1) Income:
This includes money earned from various sources (for example, a salary from a job, wages earned from a part-time bartending side hustle, and monthly cash flow earned from renting out a room in your house.)
(2) Expenses:
You’ve probably heard the saying, “everything costs money,” and it most of the time it feels true. This section includes money spent on “necessities” (that’s a fancy way of saying food, shelter, and clothing), and “discretionary spending” (another fancy way of saying fun stuff, like going to a concert, bowling, or dining out.)
(3) Savings:
This section is totally arbitrary, meaning there is no bright line rule to follow. That being said, I believe you should set aside ten percent of your income for tithing to your church (or charity) and you should pay yourself ten percent of your income by putting it into a savings account.
By the way, small businesses and solopreneurs can use this same compartmentalization for business budgeting as well.
As Publicity Coach Susie Moore says, “let it be easy.”
Lesson 4: Creating Your First Budget
If you’re worried about creating a budget that has flaws in it, don’t worry. Your budget is not chiseled in stone, you can easily modify many times as you wish, and you should be prepared to do so because we hope that our earnings (and expenses) are going to change over time.
For instance, one expense that I would gladly add is the cost to maintain an Aston Martin.
Creating your first budget is a four-step process:
Step 1: identify all sources of income and estimate the amount of each source.
Step 2: list all your expenses, categorizing them as “fixed” (I.e., rent, car payments, insurance, internet bill, and Netflix) or “variable” (I.e., groceries, electric bill, and water bill)
Step 3: determine your savings goals and allocate funds accordingly (if you’re unsure, let’s go with ten percent for starting out.)
Step 4: calculate your net income (income minus expenses) to ensure your balance is positive. If, after deducting your expenses, you end up with a negative balance, then you’ll have to cut back on your expenses until you have a positive balance.
As you can see, it’s very important to be realistic and flexible when setting and following a budget. There’s an old saying my Dad taught me, “when your expenses are bigger than your income, then your upkeep is your downfall.”
Put another way, don’t spend more than you earn, and always save for a rainy day.
Lesson 5: Tracking and Adjusting
Now that you have a budget, are you going to stick it in the drawer and forget about it like I did with my first budget? Okay, I’m ashamed to admit that I have been negligent in maintaining my personal & business budgets on many an occasion.
I wish I was more naturally adept in numbers, and I’d be the first to sign up to modify my DNA to become hard-wired to think like a CPA (that’s Certified Public Accountant, for those of you born after Gen Z – what’s your moniker, btw?)
But to the point, like going to the gym to work on our fitness, we can only get better at budgeting by doing more tracking of our spending regularly (i.e., on a daily basis).
We need to compare our “projected expenses” (that means the expenses you wrote down) to our “actual expenses” (that means what we have receipts for).
If you didn’t write down $8 Starbucks coffee every day, Monday thru Friday, on the way to work, as an expense, then you’re going to find yourself at a $40 deficit by then end of the week (which multiples to -$160 a month or –$1,920 a year!) 😳
Another time you would want to adjust your budget is when you earn another “income”source. For instance, let’s say that you create a YouTube video on gardening and you add an affiliate link to those nifty garden tools you’re using in the videos. People really like them and voila, you’re now generating an extra $1,000 a month in affiliate sales commissions! That would be a good reason to adjust the “income” section of your budget.
Finally, another great place to make an adjustment is to your “savings” compartment. Let’s say you have two or three new affiliate income sources in your business and you were able to reduce your internet bill to $50 a month, creating a positive balance of 2,050 a month. You can choose to allocate $1,000 to marketing, $500 to your emergency fund, and $550 to buy tax deeds that pay 17% interest (a nice long-term investment for your business!)
As you can see, making frequent adjustments to your budget is not only necessary, but welcomed when it comes to extra money in your pocket! Adjustments are simply modifications like driving a car, you swerve left, you swerve right, straighten the wheel, slow down, speed up, and strive to move forward towards your destination.
It may be as easy as writing down your budget with pen and paper (like I did when I first started), or you can get fancy and use QuickBooks, or use something in the middle like Excel spreadsheets. All of these methods are fine, but the one that works best is – wait for it – the one you USE!
Conclusion
In closing, you’ve learned what budgeting means, why it’s important, and how it works. You learned the 3 basic components of a budget: Income, Expenses, and Savings.
We reviewed a 4-step process for creating your first budget: income, expenses, savings, and net income (it’s sometimes called “cash throw off,” by the way).
And we wrapped up the module with a lesson on tracking and adjusting your budget regularly (translation: daily). Now it’s time for you to start budgeting by setting your financial goals, creating a budget, and start tracking your expenses daily.
You’ll get better at budgeting over time, and doing so will help you gain the benefits of financial stability, financial security, and help you achieve your financial goals!
Thank you for joining me for this lesson on “budgeting basics,” and I look forward to seeing you next week for our next lesson, “How to Create a Basic Budget for Business Expenses!”
Have a great week, everyone! And don’t forget to “Go out there and amplify your message!”
Take care!