Building a budget is an excellent way to help you figure out how much money you receive, spend, and save. They're designed to balance your income against your expenses & savings, and to guide you in reaching your financial goals.

A budget is an effective and commonly used method to improve one's financial situation, whether it means paying off debt, building a savings account, or investing more money.  For beginners just starting on their budgeting journey, this is an excellent starting point. If you make the best of it without deviating, you can experience drastic changes to your financial future.

A few essential points to consider when creating a personalized budget should be emphasized to ensure you're optimizing the benefits.  Before moving forward, consider the following points to understand how to maximize your budget to reach any goal.

1. Determine Your Budgeting Needs

To achieve the results you intend, you will first need to understand why you want to start budgeting and what your overall goals are. You're far more likely to generate a better financial situation when you stick to a budget.  

Begin with defining your end goal and what you intend to gain out of this. The purpose is to remind yourself of what you're working toward so when you get tempted to give up, your end goal will keep you motivated. Moreover, you want to work toward a specific goal rather than a general one. Specific goals produce far better outcomes. 

Reasons people decide to begin budgeting can vary widely and can include;

• To overcome an unfavorable financial situation that causes household financial stress
• To break the cycle of living paycheck-to-paycheck
• To overcome a lifestyle of overspending
• To pay off outstanding debts
• To save for future purchases such as vacations or a new home.

In addition, something to consider is that overspending results from having a lack of control over your behaviors. There are psychological factors that prevent the vast majority of Americans from moving out of the poverty cycle. It's far easier said than done, so preparing a budget with mental preparation will yield better results.

2. Determine Your Spending Habits

The first thing to do is monitor precisely where your money is being spent. This will give you a comprehensive understanding of how bad or how mild your financial situation is, making your budget more practical and tailored. 65% of American’s say they have no idea how much money they spent the previous month. This is a contributing factor to the widespread household debt in America.

There are a few effective methods and strategies to help you monitor your finances, so exercise the one that works for you.

Analyze Bank Statements (Bank and Credit Card Statements)

Experts advise that one of the best ways to review your spending history is by analyzing at least 60 days of spending and expenses. This will give you a thorough understanding of your spending habits. It will also give you an idea of what percent of income is allocated to unnecessary spending. Most online banking provides users with personalized charts that break down spending habits, doing all the work for you.

Record Your Next Two Months of Spending

Rather than looking back at spending habits, before you start your budget, prepare yourself by recording all your daily spending and recording it for the next 60 days. Depending on your preference, you can utilize a notebook or spreadsheet.

Before you begin recording, create categories of expenses and record them respectively. This will make it straightforward for you to see which category utilizes more of your income and which ones require the most adjusting.

Furthermore, it's essential to ensure that you include everything, even the small ticket purchases. Often, it's the small purchases that we consider to be unaffecting. But when added up, they tend to be the ones that consume most of our surplus income.

3. Review Your Occasional Spending

Budgets often fail or don't produce the intended outcome because people forget to factor in irregular spending. This includes holidays, birthdays, Black Friday, Cyber Monday, annual payments, and so on. Since these expenses are irregular, we often forget to budget them into our financial analysis. This creates discrepancies and unintended overspending.

Once you have everything documented, it would be best to prepare yourself to add such expenses into your budget to prevent overspending. Furthermore, when you have a precise number for how much money you spend on occasional spending such as holidays, it will put into perspective why it's important to cut spending in these categories.

To put this into perspective for you, the average American spends $998 on Christmas shopping each year, and this number inflates year after year. This doesn't include all other holiday shopping, so be prepared to either allocate enough funds to cover these expenses or be ready to slash them when you design your budget.

4. Prepare a Personal Financial Income Statement

Now that you've decided the purpose of your budget, spending habits, and occasional spending, the next significant step is to create a personalized financial income statement. This statement depicts an image of your income vs. expenditures at any given time. Moreover, it allows you to monitor trends in your spending habits and changes to your income and expenses. 

This task may seem intimidating, but it's relatively manageable. A few steps below will help you gather all the information that is needed.

Create an Income Category

This category will include all income you receive on a regular and irregular basis. This will consist of wage income from all jobs, investment income (dividend payouts), child support and alimony, irregular side hustle jobs, annual tax return, and so on. 

Create an Expense Category

This category will be broken into multiple categories using umbrella terms such as monthly household bills, miscellaneous spending, and irregular spending.

Now that you have this complete, you've created the perfect starting point to design your budget. If you enter everything correctly, you will clearly understand how much money you earn each month and where it’s being spent. Your budget is ready to be drafted.

5. Draft Up Your Budget Using the Cash Stuffing System

Here comes the fun part. One of the best ways to make this budget manageable is to make it hands-on. The cash stuffing system allows you to have cash on hand, which you will use to cover all your expenses. There are many ways to create a budget applying this method, but we will go over a few important steps to make the process easier.

Create Categories

Your categories will consist of monthly household expenses, miscellaneous expenses, debt accounts, and saving accounts. Within these categories, you will further break down each category into individual ones.

• Monthly household expenses (rent, utilities, groceries, gas, insurance)
• Miscellaneous ( leisure, eating out, gifts, holidays)
• Debt (breakdown all your debt accounts separately)
• Savings (create individual envelopes for each savings goal)

The purpose of designating a category for each expense is to define a specific dollar amount to each, making it easier to monitor and make individual adjustments. It also prevents you from overspending because, within each category, you will be conscious of exactly how much you can spend. 

Take Notes

Once you have all the categories created, it's best to note them in a cash stuffing tracker. Transfer all your category information into a tracker to give you an idea of how well the budgeting went each month. You can use a personal notebook or a digital spreadsheet for this, so long as you're entering in all information to make sure your budget results are accurate.

Makes Changes & Adjustments

At the end of each month, the notes you entered will indicate if you have cash leftover.  It's likely not going to be a regular occurrence that you have extra cash each month unless your income improves, but when it does happen, you want to be aware, so you can make the appropriate changes. 

If you've managed to save money in one or more categories, consider reassigning a lower value to that category for the next month. Use the residual income and put it toward debt or savings accounts.

For example, if you save $50 each month on eating out, you may want to consider adding $50 to a more critical category such as credit card, student loan, or savings. It might be best to allocate it to a debt account before savings because the quicker your debt is paid down, the quicker you can begin to save money. Try to make it a priority to utilize every dollar, as it will benefit you in the long term.

Final Thoughts

Now that you have an understanding of how to create and maintain a budget, you likely understand why it's essential to develop a thorough plan before arbitrability starting a budget. It's important to remember that budgets work differently for everyone, and you need to ensure it's designed to fit your financial situation. Lastly, you want to make sure you're in total control of your budget, and the best way to do that is to understand where you stand and where you intend to go with your budget goals. Take your time, make it work for you, and with commitment, you will be on your way to creating a steadfast financial future.