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What Are The Steps In The Budgeting Process?
Now that we have understood budgeting & its benefits let us discuss the steps to prepare a budget.
The steps to prepare a budget can be categorized as follows -
1. Set up a plan of action.
The first step in this budgeting process is to decide in advance what estimated proportion of your income you would like to separate as savings. This will make you plan more efficiently.
2. Identify your income.
Record all the money you earn on a periodic or irregular basis. This is important because you will use this money to manage your expenses. This may include your regular source of income, any passive income, or any other contingent income.
3. Identify your expenses.
Keep track of all the expenses that you incur, whether regular or irregular. Understanding these expenses will ensure that your budget has prepared your income for any outflows you might face in this period.
4. Prioritize the urgency.
Focus on the expenses that will require handling first, before you set out to divide income for other expenses. For example, prioritize fixed payments you have to make while preparing your budget, as you cannot afford to skip these.
5. Devise and execute the plan.
Once you have understood the magnitude of your expenses, execute the budget.
When you start practicing your budgeting process-
- Make sure to be flexible in your approach; and
- Keep making necessary changes to your budgetary limits as you go about your life.
For example, evaluate your budget if you get an increment in your salary, as your purchasing power would have increased because of it.
Since all the expenses are not predictable, prepare an emergency fund.
When following this budgeting process. it's smart to include a category for emergencies. Set aside cash for unexpected expenses in a "miscellaneous" category. This way, you're prepared without dipping into other budget areas.
