Setting up a smart budget is very similar to setting smart goals. The SMART budget should be specific, measurable, attainable, relevant and time-bound. Setting up a SMART budget doesn’t have to be difficult when you follow these five smart tips.
Tip One: ask yourself why you want to budget
Smart budget should be relevant, so you need to know the WHY behind budgeting. Ask yourself what for and why you want to save.
- Do you want to save for your education? Why? Do you want to get a degree? Change careers? Get better career prospects?
- Do you want to travel to all the beautiful places you have always wanted to see? Why? Is there something missing in your life? Do you need a change ? Do you want adventure?
- Do you want to buy a home? Why? Do you want a more comfortable life? Do you want to start a family? Do you want to have another child and you need more space? Do you want the house as an investment?
How important these goals are for you is another question you need to ask yourself. Are these just unachievable dreams or are you really determined to achieve them?
Answering these simple questions will help you set your savings goals and establish the necessary amounts. If the goals are really important to you, you will have stronger determination to achieve them. If your goals strike a chord with you, you will persevere even when saving money gets hard and you may have to give up some of your wants.
Tip 2: Divide your goals into short-term goals and long-term goals
Your smart budget should consist of short-term plans and long-term plans.
Short-term plans are plans that do not require a lot of time to achieve. Examples of short-term saving goals are:
- A down payment on a car
- A weekend getaway
- A piece of furniture
- An emergency fund (money for the rainy day: 3-6 months’ worth of your monthly expenses)
Long-term goals are goals that require considerable time, we are talking years, to achieve. Here are some examples of long-term goals:
- Paying off debt (credit card, school loans or mortgage)
- A down payment on a house
- Seed money for a business
- A trip around the world
- Retirement
Tip 3: track your spending
To see your financial situation clearly, you need to track your expenses and overall spending habits. You need to know what is coming in and out of your account every month. It is a good idea to do it over a 30-day or even 60-day period to get a clear view of how your money is working. To track your spending you can either use a spreadsheet, or a mobile budgeting app like Mint or Wally.
Tip 4: Separate fixed expenses from variable expenses
Once you know what you spend your money on, separate your expenses into fixed and variable ones.
Your fixed costs may include:
- Rent or mortgage payments
- Utility costs like water, electricity and heating
- Internet and cell phone
- Car and property insurance
- Student loan repayments
Variable costs, which may change monthly or even weekly, include:
- Groceries
- Entertainment: outings, bars, cinema, trips, restaurants, birthday gifts, etc.,
- Clothing purchases
- Beauty regimen costs
How to control your variable costs
While there is little or no wiggle in your fixed costs in terms of saving, variable costs are easier to control.
Here are some tips on how to save on variable costs:
- Prepare your lunch and dinner at home rather than go out, or at least, limit eating out.
- Do not upgrade electronics (phones, computers, iPads, etc.,), small and big appliances, if they still work just fine.
- Try to save on groceries with savings app and skip shopping if your pantry is still full. Use what you have first, then go shopping.
- Skip shopping for an entire week, once a month, if possible.
- Save at the beginning of the month, rather than at the end. That will ensure that you DO save every month.
Tip 5: Plan a monthly budget
So, you have figured out why you want to save, what you want to save for, how much you need to realize your goals and you know what your fixed and variable costs are. Now, you are ready to set up your monthly budget. To plan your monthly budget you can use the 50/30/20 method or the zero-based budget.
The 50/30/20 method.
The 50/30/20 method divides your budget as follows:
- 50% of your income goes towards your “needs,” i.e. your fixed costs such as rent, mortgage and bills.
- 30% is allocated to your “wants;” restaurants, spa visits, clothes, etc.,
- 20% goes into your savings account or towards debt repayment.
If you decide to use this method, you can automate your expenses each month. Your income is going to be automatically divided into needs and savings and you’ll only be left with the 30% allocated to “wants” in your bank account. You can then spend the leftover money without worrying about being able to pay your bills and saving enough for your goals.
The zero-based budget
This method requires you to know exactly what you are going to be spending your money on each month. You need to know your fixed ad variable costs as well as saving goals and assign each dollar you make a specific job. At the end of the month, your income minus all expenses should equal zero, so you will have $0 in your account.
Final thoughts
Life is not always predictable and you may sometimes run into financial surprises like unexpected expenses that you haven’t been prepared for. It is a good idea to plan for the unexpected and have some money saved exactly to handle such surprises. That will help you stay on track and protect yourself from becoming unmotivated.
Happy saving!
