Budgets are one of those everyday things that everyone knows are practical, but they aren’t exactly sure why they are essential. And despite the common sense of developing a budget, many people don’t know how to start creating one. So, how should you go about setting your budget? What should you put in your budget? And what will you learn from your budget? Well, before we get into that, let’s get into an even more foundational question: why should you even care about having a budget at all?
Budgets are Empowering
You’ve probably heard the old saying before: “knowledge is power.” Well, frankly, it’s true. Sometimes we confuse what we know with our assumptions, intuitions, and guesses, but this prevents clear thinking and planning. When you systematically go through all of the facts, your knowledge can help you navigate uncertainties in the future and make better predictions than if you go with a hunch.
Budgets are empowering because they help you tally up the facts; they give you a clear and legible account of the minimum expense you need to accomplish your plans—whether they are personal or part of your business operations. When it comes to spending and saving, you don’t want to lose potential profits due to guesswork. A well-planned budget will show you:
your income over time
what you are spending your money on
where you are losing money
Budgeting has a bad rap—it’s often seen as monotonous or boring—but budgets give you very real, very practical benefits.
When budgeting, you should always use the best, most accurate numbers available. Look at your monthly income and spending to determine your inflows and outflows of cash: are you making money at a steady pace? Are you seeing different patterns each month? Are your overall savings declining? When you set up a budget, it becomes much easier to answer these questions and understand your finances overall. Budgeting is a practical financial skill and can help you make better decisions when dealing with money.
The more knowledge you have about your income and expenses, the more successful you’ll be, and budgets will give you that knowledge.
What do you need to make a good budget?
Don’t worry, you don’t need to keep track of every little thing to make a quality budget.
Two categories will help you keep better track of your finances and make plans: revenue and expenses.
Revenue, also called income, is how much money you make from selling products, services, or salaries. You can divide your overall income into recurring and future income:
Recurring income is income from a job that pays bi-weekly or monthly. It depends on products or services that you sell to clients or customers on a regular basis.
Future income is income which you expect to receive if you add another product or service to your operations. It is separate from your recurring income.
Expenses (also known as costs) is how much money you are spending on your business. You can divide your overall expenses into recurring and non-recurring expenses:
Recurring expenses (also known as fixed expenses) include mortgages, rent, groceries, utilities, payroll, internet, phone, insurance, loans, and subscription fees. Any cost that you need to keep paying to ensure that your business operates properly.
Non-recurring expenses include travel, entertainment, company parties, and any other services that you can live without, or that are not part of your regular company operations.
Recurring and non-recurring expenses are a useful distinction, but you might need a bit more information if you want to know how you can be saving money. When creating a budget, it’s useful to divide your expenses into three categories: Essential (E), Non-Essential (N), and Luxury (L). This is just as easy as it sounds—if you absolutely can’t do without it, it’s essential. If it’s useful for your operations, but you could find a way to operate without it, it’s non-essential. If it’s just there for fun, for looks, or personal convenience, it’s luxury.
You can get started right away just by listing all your expenses, naming each one, and tallying up the total cost. (It’s easy to do with my pre-made expense checklist available here!)
If your revenue is more than your expenses, my friend, you’re making a profit! If your expenses are greater than your revenue, you’re in the loss.
Don’t get too distraught if you find that you are losing some money—that’s why you have a budget! Now that you know that your expenses are outpacing your revenue, you can make changes to decrease or eliminate the loss. Knowledge is power!
If you have a profit, don’t go straight into spending it on luxuries or other impulse purchases. You’ve already gone to all the effort to lay out all the essential numbers—this is the perfect time to get planning! You may want to consider:
Reinvesting back into your business (spending more on marketing, hiring, or outsourcing to save time and expand your operations).
Paying off loans or mortgages which could gather interest and burden your expenses.
Save for three or six months in case of unexpected costs, periods of low profit, or to use in future capital investments.
There are many ways you can use your profits to benefit your business, and a well-crafted budget will help you decide on the right strategy.
Working on a budget is always a little nerve-wracking and can get somewhat overwhelming. Don’t worry--I’m here. I can help you with the budgeting process and we can walk through it together. So, don’t hesitate to reach out for help. I’m here to answer all of your questions and build the best budget for you.