In these uncertain times, it is more important than ever to be financially responsible. A personal budget can help you do just that. In this article, we will outline how to create a personal budget in 6 simple steps. We will also debunk some of the most common budget misconceptions. So whether you are looking to get your finances in order or simply want to learn more about budgeting, read on!
What Does a Budget Do?
A written, monthly budget is a financial planning tool that allows you to forecast how much money you will spend or save each month. It also allows you to keep track of your spending patterns.
Making a budget may not be the most thrilling activity (and for some, it’s downright terrifying), but it’s an essential element of keeping your financial house in order. That’s because budgets are based on equilibrium. If you cut expenses in one area, you can devote more to another, save that money for a big purchase, raise your savings rate.
A budget will not work if you don’t fully disclose your income and expenses. To create an effective budget, you must be ready to deal with accurate and comprehensive information about your earnings and spending habits.
Finally, the outcome of your new budget will show you where your money is coming from, how much there is, and where it goes each month.
Why should I save money?
It’s difficult to save money. When your expenditures increase but your income does not, it can be tough. Here are some reasons why you should attempt to save money, even if it isn’t easy.
Emergencies – Saving money now might help you in a bind later. Everyone has expenditures they don’t anticipate.
Expensive things – We might be required to pay for costly goods such as a automobile or a holiday, or a security deposit on an apartment. If you have the financial means, you’ll have many more alternatives.
What are your goals? You may wish to go to college. Perhaps you must return home to see relatives in another country. These objectives might be organized and money saved as a result. Then, if you don’t utilize a credit card or borrow money to pay, you will save money on interest and fees.
How can I use my budget?
Every month, you must use a budget. A written financial plan may help you with the following:
- See where your money goes.
- See where you are able to save
- Make a budget for how to spend and save your money
Your budget may help you save money in the future. One of your spending areas could be called savings. You might try to find ways to spend less money. Then, every month, you can put cash into savings at a bank or credit union.
How To Make a Budget in 6 Simple Steps
To make a budget that works and allows you to live a pleasant and content life, you must first have a firm grasp on your present expenditures, what you can afford to spend, and what is most important to you.
Find a great budget template that you can utilize to fill in the numbers for your costs and income before you start preparing one.
It’s easier and more effective to use a monthly budget spreadsheet budgeting program than pen and paper to plan your money. These will include designated fields for income and expenses in different categories, as well as built-in functions to assist you calculate your budget surplus or deficit with minimal effort.
1. Gather Your Financial Paperwork
Gather all of your financial documents, including:
- Bank statements
- Investment accounts
- Recent utility bills
- W-2s and paystubs
- Credit card bills
- Receipts from the last three months
- Mortgage or auto loan statements
You want to have access to any and all financial data. The creation of a monthly average is one of the keys to budget making. The more information you can obtain, the better.
2. Calculate Your Income
What is the average monthly income in your area? In this case, net income (or take-home pay) is appropriate. If you’re self-employed or have other sources of money, such as child support or Social Security, include them here. Keep track of the sum total of your earnings every month.
If you have a fluctuating income (for example, from a seasonal or freelance job), consider basing your budget on the income you earned in your lowest-earning month of the previous year.
3. Create a List of Monthly Expenses
Make a note of every money you anticipate to spend in a month. This list might include the following expenses:
- Mortgage payments or rent
- Car payments
- Personal care
- Eating out
- Child care
- Transportation costs
- Student loans
To find out what you’ve spent the previous three months, keep track of your bank statements, receipts, and credit card bills.
4. Determine Fixed and Variable Expenses
Set-fee internet service, trash removal, and regular child care are examples of constant expenditures. Include items like mortgage or rent payments, automobile loan repayments, fixed expenses such as internet services with set fees, and garbage collection. Include any essential spending that tends to remain consistent from month to month if you pay a standard credit card payment.
If you want to set aside a certain amount of money each month or pay down a specific amount of debt each month, add it as a fixed cost.
The amount of money you spend on things that don’t provide any value to your business, such as:
- Eating out
Consider creating a category for “surprise expenditures” to throw your budget off track if you don’t have an emergency fund.
Determine how much money you’ll need to spend on variable costs every month by assigning a cost value to each category, starting with your fixed expenses. Then figure out how much money you’ll require to cover your variable expenditures each month.
Take a look at your last two or three months of credit card or bank statements to determine how much you spend in each area.
5. Total Your Monthly Income and Expenses
You’re well on your way to success if your income exceeds your costs. This extra money allows you to devote funds to areas of your budget such as retirement savings or debt repayment.
If your income is greater than your expenditures, use the “50-30-20” budgeting plan. Essential costs should account for half of your spending in a 50-30-20 budget, desires should make up another 30% of the money, and savings and debt repayment should each contribute 20%.
If your expenditures exceed your income, you are overspending and need to make adjustments.
6: Adjust your habits if necessary
Keep a running total of all your expenditures in your head or on paper so you can compare them against your actual earnings and determine where additional money is going.
The first place to look for reductions is in your want-to-have areas. In favor of viewing it at home, could you forgo seeing a film in the cinema? Compare the figures you’ve kept track of to see how much money you’re saving. Examine your spending on wants and requirements if you’ve already reduced your want-to
Finally, if the numbers still don’t match up, you may adjust your fixed costs. This will be considerably more difficult and require a lot more willpower, but a “need” may simply be a “hard to part with.” Such choices have significant ramifications; make sure you do your homework on all possibilities.
Small savings can truly add up over time, so don’t be penny pinched and pound stupid. You may be surprised at how much additional money you have after making one small adjustment at a time.
Debunking Budget Misconceptions
When people hear the term “budget,” they think about restricted spending or being “broke.” Fortunately, creating a monthly budget does not necessitate hoarding all of your money or drastically reducing your expenditures.
A budget is simply a tool that can help you achieve your financial goals. Because personal budgets don’t have to be overly restricting, they don’t have to dictate your life.
Sticking to a budget
It will take some time for you to change your money practices. Making and maintaining a budget takes hard work, but there are a few things to bear in mind.
Choose a method that works for you. Set goals according to your circumstances, and start looking at your finances one month at a time. Make it simple for you to keep track of income and expenses in real time, whether it’s with a daily journal or putting receipts in a folder you review at the end of each week.
Create a spending diary to track your money. This is an excellent time to take a long, hard look at your spending and see where you can save money. Create a plan that’s doable for you to help you limit impulsive buying.
Set a goal. Having an end objective and something you’re striving towards can be beneficial. Even if it’s little, rewarding yourself can help you stay on track with any progress you’ve made.
Create a network of support. It’s simpler to stick to an exercise routine when you have family and friends you can trust to provide encouragement, either by doing a budget with you or listening when you’re having problems.
A personal budget is an excellent way to take control of your money. It can help you save for retirement, pay off debt and live within your means. Creating a budget may seem like a daunting task, but it’s simpler than you think. With these six simple steps, you’ll be on your way to successful budgeting in no time!