5 Factors to Consider When Planning a Budget

woman putting money into piggy bank

If you’re serious about reaching your financial goals, you’ll need to budget wisely. Aside from making it easier to manage your money, budgeting gives you control over your cash flow and prevents you from overspending. While it might require you to make some changes or sacrifices to your lifestyle, the financial rewards will be worth it in the long run. Take a look at some of the factors to consider when planning a budget.

What You Should Think About When Preparing a Budget

1. Set Clear Goals

Before taking any action, ask yourself why you need to manage your money in the first place and what should be a priority. This will help to determine your next steps as you make decisions about your spending choices moving forward. For example, if purchasing the car of your dreams is important to you, then your goal may be to save up for its down payment. If you want to live without financial worries, your priority might be to eliminate credit card debt. In other words, you’ll be more motivated to prepare a budget if you set your sights on concrete financial goals.

2. Assess Your Income

Your net income is among the most important factors to consider when planning a budget because it will become the basis for how much you’ll put into monthly obligations and personal spendings.

Budgeting is easier when you have a fixed salary since you’ll know how much money you have to work with on a weekly or monthly basis.

However, if you have variable income with a base salary, try to work out a budget on the base salary alone and save any commission you receive. Alternatively, you can compute the average of your base salary plus commission in a year, then work out a budget from there. Include as much guaranteed income in your budget plan as possible because speculating about future money you are yet to receive can cause you to overspend.

3. Take Control of Your Spending Habits

Include your spending habits as factors to consider when planning a budget because these are areas where you can make cutbacks.

Changing the budget on fixed monthly expenses like utilities or a car loan might not be feasible, but you can make adjustments to your discretionary spending. For instance, you can reduce your clothing and entertainment spendings so you can devote additional funds toward priorities that might include saving for your children’s college fund or growing a retirement account.

As you go through the list of expenses, distinguish between wants and needs, as well as determine whether spending your money brings you closer or farther from your financial goals. It’s easier to make choices if you stick to your priorities.

4. Manage Your Credit Card Use

Debt will keep you from allocating more money towards the things that matter most to you. If you have a habit of regularly tapping into your credit card for items you don’t need, you’ll end up spending more of your budget on servicing the debt instead of saving or investing. If you have a hard time controlling your credit card spending, leave the card at home when you go out, or get rid of the card until you start to meet your budget goals consistently.

However, savvy consumers use credit cards to their advantage. Paying your credit card bills on time and in full every month eliminates interest fees, making your card an asset instead of a liability that eats away at your budget. Some cards even offer rewards points that give you cashback, credits towards airline miles, or discounts to your favorite stores. If you can still maintain a balanced budget even while using your card, then it’s probably not causing any harm.

5. Automate Your Savings

Saving money might not be your priority, but having money in the bank can give you peace of mind and a more positive outlook on the future.

Try to work out a budget plan that automatically puts a portion of your monthly income into your savings or investment account. This way, you won’t have to rely heavily on credit for emergencies or large expenditures. Besides, saving for the future helps build wealth and may grant you financial freedom.

Although having a financial plan is a personal decision, there are key factors to consider when planning a budget. Every plan is unique, and yours can be as simple or as detailed as you want it to be. When you get a sense of control over your earnings and spendings, it becomes easier to plan for the future and achieve financial independence.