According to the Investopedia, “A budget is an estimation of revenue and expenses over a specified future period of time and is usually compiled and re-evaluated on a periodic basis.”
The purpose of a budget is to try to save money for your financial goals, such as buying a house, funding for education, or funding for retirement. In order to that, you must record and review all the income and expenses you have for each month over one year period.
Usually your income is fixed and paid on a monthly basis, and there may be a bonus at the year-end. The income amount is relatively easier to estimate.
As for the expenses, most of the expenses may be fixed and you have to pay them each month, such as rental or mortgage, internet and phone bills, utility bills, car loan or lease payment, and insurance payments. You can try to save some money by changing the vendors for internet and phone services, as well as insurances. But the savings may be limited. Some of the fixed expenses may only be paid annually, such as property tax and income tax. Those fixed expenses are easier to estimate. If you don’t have enough money to pay the fixed bills, you may have to find a second job.
The remaining expenses are variable expenses, and you can actually control those expenses. Under the variable expenses, most of them may be necessary for you life, such as foods, education, and daily necessities. You don’t want to save too much, that will affect your health and wisdom. As for fun, there are lots of fun activities that are totally free. For the remaining variable expenses, which is really not necessary for your life, you may consider to cut those expenses.
Once you have a good idea of all your income and expenses, you can make a plan how you would achieve your financial goals. You have to cut your unnecessary variable expenses so that you can save some money for investment. You can setup a monthly and annual budget and set a maximum amount you can spend for variable expenses, and a minimum amount you should save for investment.
If you can’t find a way to save more, you have to find a second job for the savings. If you can successfully follow the budget and save the necessary money for investment, congratulations that you are closer to financial freedom.
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