You’ll need a personal budget if you want to keep track of your spending and achieve your financial goals.
A personal or household budget is a summary of your income and expenses for a specific time period, usually one month. While the word “budget” conjures up images of controlled expenditure, it is not necessary for a budget to be efficient.
A budget will show you how much money you plan to receive in, as well as your mandatory expenses (like rent and insurance) and discretionary spending (like entertainment or eating out). Rather than seeing a budget as a hindrance, think of it as a tool for accomplishing your financial objectives.
What Is the Purpose of a Budget?
A monthly budget is a written financial planning tool that allows you to plan how much money you’ll spend or save each month. You can also keep track of your spending patterns.
Making a budget may not sound like the most thrilling activity (and it is for some), but it is an essential element of keeping your financial house in order. Because budgets are based on balance, this is the case. Spending less in one area allows you to spend more in another, save for a significant purchase, develop a “rainy day” fund, boost your savings, or participate in wealth creation.
A budget will only work if you are completely honest about your income and expenses. You must be willing to work with precise and accurate information about your earning and spending patterns in order to create a successful budget.
Finally, the outcome of your new budget will reveal where your money comes from, how much you have, and where it all goes each month.
6 Easy Steps to Creating a Personal Budget.
You must first determine what you are already spending, what you can afford to spend, and what your goals are in order to develop a budget that works for you and allows you to live a comfortable and happy life.
Find a solid template to fill in the data for your costs and income before you start building a budget.
While you can budget your money with pen and paper, using a monthly budget spreadsheet or a budgeting tool is easier and more efficient. These will have defined fields for various kinds of income and expenses, as well as built-in formulae to help you figure out your budget surplus or shortfall with minimal effort. For the right and correct budget evalution you can look into to the debt management tool.
Step1. Determine Your Earnings
What kind of monthly revenue can you expect? Using the net income (or take-home pay) figure is OK if your income is in the form of a regular paycheck with taxes deducted automatically. Include any outside sources of income, such as child support or Social Security, if you are self-employed. Make a monthly total of your total revenue.
Consider utilizing the income from your lowest-earning month in the previous year as your baseline income when creating your budget if you have a fluctuating income (for example, from seasonal or freelance employment).
Step2. Make a list of all of your monthly expenses.
Make a list of all the expenses you intend to incur over the course of a month. This list could include the following items:
- Rent or mortgage payments
- Payments for automobiles
- Insurance
- Groceries
- Utilities
- Entertainment
- Personal attention
- Going out to eat
- Childminding
- Costs of transportation
- Travel
- Loans for students
- Savings
- To track your expenditure, go through your bank statements, receipts, and credit card statements from the previous three months.
Step3. Calculate Fixed and Variable Costs
Fixed expenses are those that must be paid on a regular basis and for which you pay the same amount each time. Include payments for a home or rent, a car, a fixed-fee internet connection, trash pickup, and regular child care. Include any additional important spending that tends to stay the same from month to month if you pay a standard credit card payment.
Include savings and debt repayment as fixed expenses if you plan to save a set amount or pay off a set amount of debt each month.
Variable expenses are those that vary from month to month, for example:
- Groceries
- Gasoline
- Entertainment
- Going out to eat
- Gifts
If you don’t have an emergency fund, set aside money for “unexpected expenses” that may arise during the month and throw your budget off track.
Beginning with your fixed expenses, assign a spending value to each category. Then figure out how much you’ll need to spend on variable expenses each month.
If you’re not sure how much you spend in each category, look over your credit card or bank statements from the last two or three months to get an idea.
Step4. Add up your monthly earnings and expenses.
You’re on the right track if your revenue exceeds your costs. This extra cash allows you to allocate monies to other areas of your budget, such as retirement savings or debt repayment.
Consider using the “50-30-20” budgeting method if your income exceeds your expenses. In a 50-30-20 budget, “needs,” or essential expenses, should account for half of your budget, “wants” should account for another 30%, and savings and debt repayment should account for the remaining 20%.
Step5. Make Expense Adjustments
Find areas in your variable expenses where you can cut if your expenses are larger than your income. Look for ways to cut costs, such as dining out less, or eliminate a category, such as canceling your gym membership.
If your spending exceeds your income or you have a lot of debt, lowering your variable expenses might not be enough. To balance your budget, you may need to reduce your fixed expenses and raise your revenue.
Aim for a balance in your revenue and expense columns. This equal balance indicates that all of your earnings have been accounted for and allocated to a specified cost or savings goal.
Step6. How to Make the Most of Your Budget?
You must monitor and continue to track your expenses in each category after you have set up your budget, ideally every day of the month. The same spreadsheet or tool that you used to create your budget can also be used to keep track of your expenses and revenue.
Keeping track of your spending throughout the month will help you avoid overspending and detect unneeded or problematic spending trends. Rather than waiting until the end of the month to record your costs, take a few minutes each day to do so.
If you’re not sure you can personal budget your money, use the envelope system, which divides funds into separate envelopes for different areas of spending. When an envelope is completely empty, you must stop spending in that area.
Keep track of how much you’ve spent as you go through your budget. You’ll need to either stop spending in that category for the month or move money from another category to meet further expenses once you’ve reached your spending limit in that category.
Your budget’s goal should be to keep your monthly spending equal to or less than your monthly revenue.
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Examine and improve Your Financial Plan
Situations change. When we change jobs, relocate, or have children, our priorities vary. Make it a point to sit down with your budget every few months and make sure it’s still working for your current goals and reality.
If you’ve already entered your numbers into a program or website, it’s simple to fiddle with your budget categories to discover where you might save money or prioritize one item over another.
Remember that your personal budget should serve you rather than the other way around.
