Money makes the world go round. You work for money in order to be able to offer yourself a high quality of life. Given the importance of money, you don’t want to be blind to your own financial realities.
With proper planning and budgeting, you can get the most out of your hard-earned money and achieve a level of security when you’re in control of your income, expenses, and overall financial situation.
Time and money
Typically, you want to set a monthly and yearly budget. Income and expenses are likely to change after a year. So, longer-term budget projections aren’t helpful for anything other than getting a very general idea of what the future might look like.
The best money tracking app is a great way to visualize the complexity of your budget over time. Tools like this can help you organize your monthly and yearly budgets in a logical way.
Benchmarks of a realistic budget
Of course you want to earn more than you spend and save some, but it’s not as easy as it sounds. When setting your budget, you have to be brutally honest with your expectations.
A realistic budget meets at least all of the following requirements
- Consideration of all costs and income
- Is not too generous
- Spend a certain amount of money on savings
- Takes into account possible emergencies and surprise costs
- Includes reasonable costs for food, accommodation and utilities
- Determine your income
Calculate your costs
Put simply, your costs are your expenses. To better understand your costs in the context of your overall budget, it’s important to break down your costs into fixed and variable costs. With this information, you can better understand your cash flow and identify where you can save.
Your fixed costs are unlikely to change in the short term, but will in the long term. With an annual budget, it can be assumed that these costs are stable. If you rent on a monthly lease, your rent may change throughout the year. Therefore, allow an additional 20% of your finances for total annual rent, just in case.
These are the costs that should change every month. Variable costs are made up of essential and non-essential costs. Core costs are the things you really need, and non-core costs are the extra things you can safely live without.