Back to Basics – Budgeting

When it comes to finances, there are several basic concepts one should understand. Having a general understanding of these basic concepts can help advance your financial life more than any other program or practice. Over the next few weeks, we will provide an overview of these concepts.

The first basic foundation of financial freedom is budgeting. Having a financial plan is probably the most important concept when it comes to having a healthy financial life.

1. The Why

The first step in creating a budget is finding your motivation – what is your reason for wanting to gain control of your finances? For me, it was about gaining financial freedom, the freedom to making informed decisions about my purchases. It was about being able to pay off our debt and become debt-free, so we could live freely within our financial means. Creating a budget allowed me to see the parameters of our income, and how my spending was actually harming our family’s finances. Once I saw that, the budget became much easier to maintain. I learned to freely spend within our budget, and be comfortable with all of the financial choices I made.

2. One Step at a Time

The second component to a successful budget is taking is one step at a time, rather than trying to conquer the beast in one step. It takes time to create a successful financial plan, for many reasons. It takes time to figure out a system that works for you and your family. And it takes time to figure out the correct numbers for your spending. When drafting your initial budget, you may think you spend a certain amount each month on groceries. But after the first month on a budget, you learn the actual amount you need to spend on groceries is much higher. So it takes time to learn the right numbers and make adjustments as you go.

3. Stick to it.

The most important component of the budget is consistency. In order to be successful in gaining financial freedom, you must follow your plan with consistency. You need to live out what you said you would do on paper. There are a variety of ways to do this, different systems that people have found success with. Some people use a daily tracking sheet and reconcile it with a monthly budget sheet (tracking your purchases daily and then reconciling monthly). Other systems that are successful are cash envelopes or automated banking. Whatever the system, it needs to be one that you will follow and follow consistently.

This is the basic budget framework. If you want more information on how to write a budget, check out our free budget spreadsheet. We also have several articles about this, just search the category “budget” on our blog.