Allocated Budget: Using Money Effectively
We’ve all heard of allocated budget, but what exactly does it mean? How can we apply it to our everyday lives? And how can it help us reach our financial goals? In this article, we’ll answer all these questions and more! Read on to learn more about budgeting – and how it can change your life forever!
What Is An Allocated Budget?
An allocated budget helps you manage your money more effectively. If you itemize your expenses (separate things like rent, gas, and entertainment), you’ll have a better sense of how much is spent in each category and where your money can be saved. Allocating works by taking your total monthly income, subtracting monthly fixed expenses like rent and utilities, then breaking down what’s left into categories (like food, travel and socializing). You’ll need three spreadsheets to make an allocated budget work—and they will all be online. First, use Mint or another free tool to track your spending. Then head over to Personal Capital or YNAB (You Need A Budget) for their respective tools for managing cash flow and creating a budget based on current spending habits. Finally, create a spreadsheet using Google Docs or Excel with two columns: one for current spending habits and one for new allocations. This way, you can easily plug in each expense as it comes up.
What Are The Benefits Of An Allocated Budget?
Having a budget can help you make better financial decisions by paying more attention to your spending. When most people think of budgets, they assume that it means no fun money, but that’s not always true. With an allocated budget, you can set aside a certain amount of money for yourself every month and use it however you want. You could even set it up so that each paycheck has different amounts for different categories like entertainment or food, or transportation. It all depends on what works best for you.
How Do I Put Together An Allocated Budget?
There are many methods you can use when putting together your allocation budget. When starting your business, with an allocated budget it’s best to create a simple budget that allows you flexibility over where and how you spend money. For example, you could start with income, fixed expenses, and discretionary spending. Under income, list your annual salary as well as any expected quarterly bonuses or extra revenue from clients/customers/partners; under fixed expenses, list all of your recurring expenses such as rent or mortgage payments (if applicable), car payment(s) and utilities; finally, list all of your planned expenditures for things like marketing and travel under discretionary spending. Once you have your base budget set up, try adding some additional columns to see how each expense is impacting your bottom line. For example, add a column for what percentage of each payment toward taxes or overhead costs. Then take a look at each category individually and see if there are areas where you might be able to cut back on costs without sacrificing the quality of life too much. The idea here is to start by creating an easy-to-follow plan so that you don’t feel overwhelmed by finances—and then work on tweaking it until it’s perfect!
Step 1: List all your expenses.
It’s better to start with a tangible, visual list of expenses. Even if you have a good memory, writing things down is always more effective. So grab a pen and some paper and make yourself a list of your expenses for last month or any period that works for you. With an allocated budget, be sure to include all significant costs—food, transportation, rent/mortgage, utility bills—and any smaller payments like subscriptions or memberships. Don’t forget about taxes (self-employment tax can add up!), entertainment spending, and other fun stuff. It may seem tedious, but it’s essential; to be honest with yourself to get an accurate picture of where your money is going each month. Just do it!
Step 2: Eliminate recurring monthly expenses.
The most obvious way to save more money each month is to reduce your recurring monthly expenses. In particular, you should look at cable TV, gym memberships, cell phone bills and high-interest credit card debt. It’s easy to keep track of these significant expenses because they come directly out of your checking account each month. The easiest way to eliminate them is not to use them anymore. With an allocated budget, make it your goal not just for a month but forever (or until something better comes along). You can also call or visit customer service representatives and cancel services that you no longer need or want and negotiate a reduction in fees with companies if you have been a loyal customer for many years.
Step 3: Group your remaining monthly expenses into each category.
For example, food, clothing, and entertainment. Divide your remaining monthly budget by 4 and write down that amount for each category. This is how much you should spend per month in each category every week. For example, $50 in food x 4 = $200 per month divided by 7 days = $28 per week or around $3 per day. When purchasing an item, it falls into one of these categories: milk would fall under food, not clothing and gas would fall under transportation, not entertainment, unless it was part of your commute to work (which could be considered a tax write-off). With an allocated budget, stay committed to using cash only for all your purchases, no matter what category it falls under, for two weeks, so you do not deviate from your plan.
Step 4: Rank your costs in the order of importance. Then, deduct expenses until you reach your limit.
If you’re living paycheck-to-paycheck or already on a budget, but you’re not saving anything because your expenses are too high, it might be time to go back to Step 1 and reevaluate your priorities. This is where having a list of all of your expenses will come in handy. Most people have between 80% and 90% of their income going toward fixed costs (rent, car payments, utilities), making it easy for those last 10%-20% of discretionary income to get used up quickly. With an allocated budget, figuring out where most of your money is going will help you figure out what needs are more important than others.
How Should I Go About Creating My Expenditure Categories?
Once you’ve written down everything you spend money on, it’s time to look at your list and figure out how to make sense of it. With an allocated budget, start with your most significant expenses — housing, food, transportation, etc. — and label them. If you rent an apartment or home in a different location every month, categorize those monthly payments separately from others on your list. Or, if you’re spending $1,200 on gas each month (for multiple vehicles), include it as its category instead of adding that amount across all other types (or don’t add it at all). Consider what classes could be expanded to place smaller items under broader umbrella terms instead of cluttering up your list with additional detail in each entry. With an allocated budget, For example, you might have entertainment as one general category with subcategories like concerts, movies, books, etc. Other options include combining similar types into one — e.g., grocery shopping and household supplies can be incorporated into one broad food section. The point is to create a system that makes sense for you while still being comprehensive enough to provide accurate information about where your money is going.
Pick Expenses That Are Important To You and Will Help You Achieve Goals.
When you create a budget, it’s important to remember that you’re making choices about spending your money. For example, if you want a vacation but can’t afford one right now, choosing not to go may impact your mental well-being and affect your long-term goals. When prioritizing expenses, consider what’s most important in the short and long terms. The balance of fun versus saving is personal; make sure they align with your bigger goals. If a pair of shoes could help or hinder progress toward those goals—that’s worth weighing in on when deciding where you’ll spend money. And always ask yourself if an expense advances what matters most in life for you and your family before paying for something new.
Bottom Line On Allocated Budget
I was satisfied with my overall performance last year. I did not hit all of my goals, but I learned a lot about how to use my money better, and for that reason alone, it was a good year. Still, certain things can be improved; therefore, here are some changes in my allocations for 2013. As you will see from my income statement below, I had $50K left over at the end of 2012. My income exceeded my expenses by $10K (I made $60K total). To make sure that I have enough money left over at the end of each month, I will allocate an additional $5K per month towards savings and retirement accounts (in addition to what is already being saved). This will leave me with an extra $15K after every month. The only problem is that if my income increases next year (as expected), then so will these savings amounts! That means less money available for spending on other things, but that’s ok!
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