Creating a monthly budget is important to saving, being debt free, building long-term wealth and security. This is easy enough to say and not so easy for many people to actually do. Knowing what your money is being spent on can help with saving more of it.
Depending on a person’s income and their lifestyle it can be easier or harder to budget, but a person does not have to be wealthy in order to save money and be debt free. This is sometimes quite the opposite with wealthy people being in more debt living day to day compared to just your everyday person. Being smart with money starts with making a budget. Know where the money is coming from and where it is going.
Here are 8 Simple Steps to Creating a Budget
1. Know Your Income
To start any budget, it is important to know what income is coming in. This should be the net amount after tax and benefits. For many people working for an employer, it will also be the final amount paid out minus insurance or retirement contributions and any additional employee benefits taken out. The net amount can be much less than the gross figure so it is important to use this as the income in budgeting.
For someone that does not have a stable income, it can be a little more difficult to get an accurate number. Use an average of 3-6 months or years if available. This may have to be adjusted at some point, but it can be a good place to start.
2. What Do You Owe?
Fixed and Variable Expenses
The next step in figuring a budget is knowing what you owe. There are fixed monthly expenses, such as mortgage or rent, and ones that can vary slightly. Electric bills, water, and gas may all slightly differ depending on the time of year. Food and gas for a car are also examples. These can vary somewhat from month to month.
Take the Average
To calculate some of the variable expenses it can be a good idea to take an average. For example, with an electric bill take 3-6 months of service and divide by the number of months being used.
Hopefully, this list will be non-existent or minimal. If it isn’t, then one of the first major goals with a budget should be getting these things removed. Things like auto loans, student loans, and credit cards are all debt that is owed. These are the types that need to be paid off as quickly as possible and establishing a budget should accomplish this. To begin budgeting with these take the minimum payment that can be made as the recurring amount.
3. Create Spending Categories
Create categories for monthly expenses and start filling them in with the type of fixed and variable expenses that are expected. These will be the recurring monthly expenses that will be expected.
4. Calculate Income Minus Expenses
Once recurring expenses are calculated, it is time to see what is left over at the end of the month by taking the income less expenses. This is now the amount of money available at the end of the month for planning, eliminating debt, and saving.
5. Pay Yourself First
With a budget, it is always best as the old saying goes to “Pay Yourself First.” This does not equate to buying things, entertainment, and fun. But to put money away. It is important to be practical and also realistic.
When putting money away set it up so it is done automatically. This could be an automatic debit each month from a checking account into a savings account. It does not have to be overdone. Just a little bit often will not be missed and this will encourage better spending habits.
Paying off any debt with money left over at the end of the month should be a priority. Interest and fees add up over time so it is important to get these paid off as soon as possible. Forgoing other savings for a short period of time to eliminate debt can be a good idea. Paying off debt is paying yourself first because it will have an impact on the amount of money that can be saved later.
Although it can be argued that all debts should be paid off before saving for an emergency, my opinion is that some money should be put into an emergency fund each month. A good emergency fund can prevent further debt and improve the time period for paying the existing debt by not accumulating more. Even a small amount of $50 to $100 a month can quickly add up to ensure additional debt is not accumulated in the event of an emergency.
Once debts are paid and there are good savings established, contributions to retirement should be made. If these are already being done through an employer with a paycheck deduction each month, then more can be put into a savings or emergency fund. Most money managers would propose at least 15% of a person’s income be saved into retirement. This is not always realistic. At least 10% is a good starting point. If an employer has a match then the amount to meet this should be saved each month even while debts and an emergency fund are being established. Not taking advantage of an employer match is leaving money behind.
Treating yourself should not be overlooked. Once a budget is carefully planned, set aside a reasonable amount to enjoy yourself each month. What is life worth living if it is not enjoyed? A number of people that talk about budgets and money only discuss the aspects of saving and paying off debt. This should be done and can be accomplished even while taking a little to enjoy things. It may take a little longer to get there, but it will be a much more enjoyable journey.
If you have a large amount of debt, treating yourself once in a while can be one of the most important things to do. Don’t spend unwisely, but do enjoy life. Set aside a little every month even if it means taking away a little from the other things.
You will be miserable if you can’t enjoy life once in a while. Take a little money and set it aside for enjoyment and make sure to stick to the dollar amount set. This is the key. Do not overdo it, but do it.
6. Keep Track of Your Income and Expenses
Now that a budget has been established to keep track of the expenses. A spreadsheet on a computer will work or there are some apps that can also help like Mint. The mint app is free and allows a person to connect all of their finances to one place to get a big picture. It will categorize expenses to show where money is being spent.
Small expenses add up and it is important to keep an eye on these. That $3 cup of coffee bought each morning adds up to $15 a week during five days, $60 or so a month and $720 a year. Cutting back on many of just the littlest things will make a budget go much further.
7. Be Organized and Disciplined
Being organized is crucial to staying on a budget. If you have a checking account ensure to use the register to record all transactions or use an app and stick to the budget.
8. Use Cash
Convenience is great, but it can also facilitate bad spending habits. Although credit cards need to be repaid, a number of people that use them surprisingly do not understand they need to be repaid in full without incurring interest fees. Using credit cards do have their place, but it should not be for daily expenses and they should always be paid in full. Some may argue that reward points are a big appeal for using credit cards, but if you do not pay the balance in full the rewards are costing money. You might as well buy a plane ticket instead of using those reward points.
Use cash whenever possible. This helps with not going over budget. Debit cards are much the norm now so these could also be used in place of carrying large amounts of cash.
A Successful Budget Can Change
Building a budget does not have to be complicated. However, sticking to one can be difficult. Planning and being organized with a budget are tremendously important. The benefits of having one are knowing where your money is going. Furthermore, it will also help you accomplish goals and enjoy life.
Budgets can change over time with life and income. These changes should be recognized and a budget should be adjusted accordingly as needed. Stick to a plan and be organized. A good budget can go a long way.