As you become more tuned in to your personal finances, the concept of budgeting often comes into place. However, there is no “one-size-fits-all” type of budget because the effectiveness of a budget is highly dependent on whether you can stick to it.
More often than not, the amount of your budget is determined by you. It is meant to be a mental reminder that you cannot spend more than a certain amount, if you plan to meet your financial goals.
Some people prefer to break down their budget into specific categories such as groceries, gas, dining out and entertainment. Others may just establish a fixed amount of money that goes into savings and the rest can be spent freely — until it runs out.
Remember that budgets usually cover discretionary spending, not recurring monthly bills for rent, mobile phone subscriptions, insurance, etc. Budgets apply most appropriately to discretionary spending because those are the costs that are available for compromise. If you want to save an extra $25 per month, you could eliminate two trips to the movie theater to make that happen.
The first step to creating a budget is understanding how much you are currently spending so you can identify where you can cut back. Today, there are plenty of ways to do this. One easy way is to use a personal financial management tool, which aggregates data from your bank and card accounts. Smartphones also offer a convenient way to record expenses through mobile applications. But, a simple pen and notepad will work just as well.
After tracking expenses for several weeks, you can begin deciding where and how you can reduce your spending. Instead of just coming up with an arbitrary number for your budget (whether it is going to be divided into separate categories or not), come up with a number that you want to save — which should be setup as an automatic transfer to your savings account.
Which types of spending you plan to reduce should be your choice. As long as you are able to stick to your budget, and consequently build your savings, this endeavour can be deemed successful.
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