Having a budget is the best way to control spending. It also helps to reach your financial goal easily. With a personal budget, you can compare and track your income and expenses for a given period of time. If you think budget is only associated with restricted spending then it is a misconception. A budget does not have to be restrictive to be effective. More precisely, a budget is a tool to achieve your financial goal.
Let’s find some ways to make a personal budget.
What does a Budget do?
A monthly budget is a financial tool that helps to plan how much you will spend and save for each month from your earning. Through a monthly budget, you can also track your spending habits. To make an effective budget, you must be willing to work with detailed and accurate information about your earning and spending habits.
Related post – Tips to save for retirement successfully
Steps to make a budget
Step 1# Use a good template
You may want to live a happy and comfortable life by creating a budget but for that, you should need a firm handle on your income, spending, and priorities. For making a good budget first thing you need is a good template. Instead of using old-fashioned pen and paper, you can use MS Excel. Define designated fields for income and expenses in various categories. There you will find built-in formulas to help you figure your budget surplus or shortfall with minimal effort.
Step 2# Gather your financial statements
You can get all your income and expenses details from financial statements. This includes:
- Bank statements
- Investment accounts
- Recent utility bills
- Credit card bills
- Receipts from the last three months
- Loan statements
You can dig up more information from the above statements and make a monthly average.
Step 3# Calculate your total income
How much income can you expect in a month? This just not includes your monthly salary. You may have other investments also, so accumulate that from your financial statements. If your income is in the form of a regular paycheck where taxes are automatically deducted, then using the net income (or take-home pay) amount is fine. If you have a variable income (for example, from a seasonal or freelance job), consider using the income from your lowest-earning month in the past year as your baseline income when you set up your budget.
Step 4# Create your list for monthly expenses
Make a list of all the expenses you expect to have during a month. This list could include:
- Mortgage payments or rent
- Car payments
- Insurance
- Groceries
- Utilities
- Entertainment
- Personal care
- Eating out
- Childcare
- Transportation costs
- Travel
- Student loans
- Savings
Use your bank statements, receipts, and credit card statements from the last three months to identify all your spending.
Step 5# What is your fixed and variable expenses
You have some fixed monthly expenses like house or car rent, childcare, internet bill, etc. If you pay a standard credit card payment, include that amount and any other essential spending that tends to stay the same from month to month. If you plan to save a fixed amount or pay off a certain amount of debt each month, also include savings and debt repayment as fixed expenses.
Variable expenses are the type that will change from month to month, such as:
- Groceries
- Gasoline
- Entertainment
- Eating out
- Gifts3
Along with this, you may face surprise expenses which may be an emergency expense that may pop up in a month. Start assigning a spending value to each category, beginning with your fixed expenses. Then, estimate how much you’ll need to spend per month on variable expenses.
If you’re not sure how much you spend in each category, review your last two or three months of credit card or bank transactions to make a rough estimate
Step #6 Compare your monthly income and expenses
Now total your monthly income and expenses separately and compare the amount. If your total monthly income is greater than monthly expenses then you are off to a good start. This extra money means you can put funds towards areas of your budget. This extra money you can spend for future like retirement savings or paying a debt.
If your expenses are more than your income, that means you are overspending and need to make some changes. In this case, you need to make adjustments to your expense. If you’re in a situation where expenses are higher than income, find areas in your variable expenses you can cut. Look for places you can reduce your spending.
Final verdict
Circumstances of our life change. So as our priorities. We change jobs, we move to a new places, we have children. So it is always necessary to revisit our budget planning every few months so that it can tally with our current realities and goals.
Remember, your budget must match our needs and not the other way around.
Great content! Keep up the good work!