Creating a balanced budget is not that complicated when you know what you are doing. But, it can be challenging for those with limited resources or those working with a tight budget. In order to create a balanced budget, you will need a strategy and this article has all the tips you need to achieve that.
Many people do not create budgets which is one of the reasons they struggle financially. Those who create budgets find it difficult to balance them. Although the reasons behind this budgeting issue vary from one person to another, the following factors are some of the reasons people struggle with budgeting.
- Not understanding one’s true financial standing
- Wanting more than neccessary (strong desires to own things)
- Underestimating the true cost of your business operations
- Lack of planning
- Not knowing how to reuse resources you have already
- Not knowing the difference between a need and a want
- Lack of knowledge
So, how to create a balanced budget?
Balancing your budget should be one of your top priorities. This is because an unbalanced budget will force you to borrow money that will cover some of your expenses. You know where this practice leads eventually. If you thought about overwhelming debts and bankruptcy, you are right.
Take the necessary steps to balance your budget and save yourself from financial hardships.
This article will walk you through the key points you need to consider to create a balanced budget. If yours is unbalanced already, the same points can serve as a guide to balancing your budget.
Without further ado, let’s see how you can create a balanced budget.
1. Evaluate your recent financial activities
Before you make decisions that will affect your future, you need to understand where you are coming from. You need to know the money decisions you have been making and how they affected your finances.
Have you been struggling with balancing your budget recently? If so, why do you think things did not go well? What went wrong with your budget? Did you overestimate your revenues and fell short? Did you spend more money than you were supposed to on a piece of equipment, etc?
You need to know why your past budget has been unbalanced. Once you know the true cause of this issue, you will then work on the solution.
A budget is something that needs adjustments over time to make it work. So, knowing the historical performance of your budget can help you make the changes necessary in order to balance it.
2. Having achievable goals will help you create a balanced budget
One of the main reasons people find it difficult to create a balanced budget is that they shoot for goals that are not achievable given their financial standing. When making financial decisions, it is not a good idea to have goals that will come with long-term financial stresses.
This is true especially when those goals do not directly contribute to business growth or bring in more revenues. Or help you make money more or increase your net worth (for personal budgets).
Before you start budgeting for your goals, make sure that your current financial abilities will support those goals. Look at your finances and establish goals you can achieve in a given time without going over budget or having to borrow. Always remember that your success is an ongoing project and it is better to take it one step at a time.
3. Distinguish wants and needs in your budget
One important point that people miss when creating a budget is to confuse needs and wants. Let’s evaluate both points one by one.
So, what is a need?
A need is something that you cannot live without or something essential/important in your daily life. For example, you cannot live without food. If you don’t eat, you will die. For this reason, food is a need.
What is a want?
A want is something you desire but you can afford to live without having it. Wants are usually associated with emotions. I want this, I want that. I will be happy if I have that. These kinds of emotions force you to buy things not because you need them but because you want to satisfy your internal desires.
For example, a Netflix subscription or a second car is a want. This is because you can live without Netflix and you can find free alternatives. Also, the car you have now can take you places without buying a sent one.
Separating needs and wants in your budget is critical. You need to organize all your expenses and separate needs and wants. This will help you spend money exactly where it is needed.
Knowing what is a need and a want also helps you when balancing your budget. That is you can easily cut down wants to save more money without reorganizing your budget or picking up a second or a third job.
4. Avoid unnecessary expenses and questionable loans
This point is crucial in your budgeting practices. You cannot create a balanced budget without watching your expenses. How much you spend and where it is spent matters.
For example, the money you spend when you upgrade to the newest electronic version is an unnecessary expense. If the phone you have already worked well, then the newest version is not adding any value to your life. But it is taking away that $1,200 that could have been used to buy income-generating assets such as stocks or saved in your emergency fund.
You must also avoid questionable loans such as borrowing money to buy a brand new car. A brand new car depreciates much faster, you pay high interest on these loans, you will have coverage, and more.
Guess what, you could have bought a used car at a fraction of the cost without getting in debt. Instead of using that $5,000 as a down payment on a new car, buy a $5,000 used car! Taking control of your finances requires no extra education. Simple decisions like this do the trick.
5. Know your near term and long term earnings
It is always important to know your near-term financial situation and long-term when necessary. Before you illustrate all your expenses in a budget, first check to see if you are going to have an income that will cover those expenses.
For a personal budget, it is easy to tell how much you will be making in the near term. Most people have one income, and therefore, all your earnings will be tied to this income.
When it comes to businesses, however, it can be challenging to estimate your future earnings. This is because your sales are affected by many factors that are outside of your control. For example, an economic downturn can negatively affect your sales and there is nothing you can do about it.
Even if you cannot tell exactly how much revenue you will have, at least have some estimation. This way, you will be making a budget based on what you think you will make not based on what you used to make. Budgeting without knowing your future earning potential leads to creating unbalanced budgets.
6. Make adjustments when necessary
Your budget is an adjustable tool to keep you in check. A good budget is one that can be adjusted to meet your current financial demands or future projections.
For example, if you are expecting to lose half of your sales, it would be safer to make a budget that reflects this change. That is you should not buy that new equipment you were thinking about. Why spend more money on advanced and expensive equipment when you are about to lose half of your customers?
Save that money for later.
The same strategy should also be used for personal budgets. You cannot keep all your extravagant expenditures on your budget after your boss lays you off. Your paycheck is no longer coming in to support your expenses. So, you must adjust your budget to meet your current financial situation. For example, if you were living in a $3,000 home, you can make some adjustments and move into a $1,500 apartment until you land a new job.
