A budget is a tool to keep track of your income and expenses over a certain time frame. Creating a budget is an important step toward getting your finances in order. It puts you in charge of every dollar that you earn or spends and makes it easier to save money for your financial goals such as building an emergency fund or saving for a down payment on a mortgage.
Creating a budget is easy and it should be simple enough for you to follow. Once you have the right budget, that works for you, you can stick to it while making minor tweaks along the way as your spending habits or income change.
The following steps can help you create a budget:
Step 1: Calculate Your Monthly Income
The first step is to calculate your net take-home income every month excluding taxes and other deductions. Consider all your income sources like a monthly salary from your job, income from your business, payment from clients if you are a freelancer or self-employed, passive income sources like rent from property, and income from your blog or YouTube channel.
Make a list of all your income sources and how much you usually make every month. Use the take-home amount that you get after deducting tax and other deductions. If your take-home income varies every month, use an average amount as your monthly income.
Step 2: Calculate Your Monthly Expenses
Once you have your income in place, it’s time to add up your expenses. List down all the expenses that you incur every month. That will include both fixed expenses and variable expenses.
Fixed expenses can include:
- Rent
- Debt payments for your debt repayment plan
- Tuition fees
- Insurance premium
- Utility bills (cable, cell, electricity, water, etc.)
- Mortgage
- Gym memberships fees etc.
Variable expenses can include:
- Credit card bills
- Groceries
- Entertainment
- Travel costs
- Eating out
- Gas/transport costs
- Shopping
- Personal care
- Magazines/newspapers
- Spa/salon services etc.
Add up all your monthly expenses. You can check your bank account statement or credit card statement to make sure you considered everything.
Step 3: Subtract Expenses from Income
The last step is to subtract your monthly expenses from your monthly income. Ideally, you should get a positive number, that indicates you are saving something every month.
In case you fall short, i.e., your monthly expense is more than your monthly income, you need to revisit your expenses and look for areas where you can reduce them. A needs vs wants analysis can help you identify expenses that you can eliminate. On the other hand, if your income is more than your expense, then you are already ahead of the game. You can use this extra money towards your savings, investments, or emergency fund. Occasionally, you could use this money on non-essential things like dining out or travelling.
How to Stick to Your Budget?
The most difficult part of a budget is the commitment to sticking to it. You can often get carried away with your spending and end up with little to no savings for your future. Sticking to your budget will help you become more disciplined, get your finances in order, and save money for your financial goals.
Here are some tips to help you stick to your budget –
- Sleep over your big purchases. Take some time to think if you need it.
- Never spend more than you have or want to.
- Track your expenses regularly.
- Whenever possible, pay with cash instead of your debit or credit card or other digital mediums.
- Learn to cook.
- Buy your groceries and other essential supplies in bulk at a discount.
- Stick to a lower credit card limit.
- Review your budget every month and make adjustments if your income or spending pattern changes.
- Get yourself some reward for sticking to your budget.
Summing Things Up
- A budget is a great way to track where your money goes each month and an important step to getting your finances in order.
- Three steps to create a budget-
- Calculate your net take-home income for every month from all your income sources excluding taxes and other deductions.
- Calculate your monthly expenses including fixed and variable expenses.
- Subtract your monthly expenses from your monthly income.
- If your monthly expense is more than your monthly income, you need to revisit your expenses and look for areas where you can reduce them.
- if your income is more than your expense, use this extra money towards your savings, investments, or emergency fund.
- Review your budget every month and make minor tweaks along the way as your spending habits or income change.
- Build good financial habits and stick to your budget.
The Bottom Line:
Budgets are essential for keeping track of expenses and income, identifying spending patterns, developing savings, and avoiding debt. Without a budget in place, it’s easy to overspend and end up in debt if you’re always turning to credit cards or loans to fill the gaps. While creating a budget is important, sticking to it is even more essential. Review your budget regularly and make necessary adjustments along the way as your spending habits or income change.
Pingback: 10 Fun and Exciting Budgeting Activities for Adults that You’ll Love |
Pingback: Teaching Kids Money Management through Allowances: Complete Dos and Don’ts |