A budget is like a plan a person has for every dollar they earn. Whether the paycheck varies from month to month or stays steady, a budget is useful to keep expenses, savings, and all other financial obligations organized. It provides a manageable system that can be used to gain financial freedom and reduce money-related stress. Also, a budget gives insights into one’s spending habits and helps one plan expenses efficiently.
1) Calculate the Net Income
A useful monthly budgeting tip is to start by calculating one’s take-home pay or net income. This is the total salary after deducting the taxes and employee benefits like insurance premiums and 401(k) contributions. In other words, it’s the total amount that the employer deposits in the employee’s bank account after every pay period. One needs to be careful not to consider the total pay as it can lead to confusion that more money can be spent than what is actually available. For gig workers, contractors, freelancers, or those self-employed with irregular income, it is crucial to have detailed and organized records of the pay and contract.
2) Keep Track of Expenses
Once it is clear how much money is really coming in, the next step is to find out where everything is going. This involves monthly expense tracking and categorizing. Doing this can help determine key expenses and identify areas where one can cut back on spending. To do this, make sure to record all the daily expenses. Repeat this step for several weeks or even months to find a pattern in spending habits. There are several options to keep track of expenses, from budgeting spreadsheets to dedicated smartphone apps, online templates, and journals. Make use of bank and credit card statements since these have itemized lists of all the expenses, and also group them into various categories like entertainment, mortgage, food, and utilities. Clubbing fixed and variable expenses in their respective categories can also help. Fixed expenses include monthly bills like car payments, rent, and utilities. Variable expenses, as the name indicates, change every month, like entertainment, groceries, and gas. These are usually the expenses that can be easily cut back on.
3) Have Reasonable Goals
When thinking about how to create a budget plan, start by making a list of financial goals, both short-term and long-term ones. This can be done by reviewing the information on expenses that one has tracked and recorded. In general, short-term goals usually take about three years to achieve. These can include settling credit card debt or building an emergency fund. Long-term goals are those that go on for decades, like building retirement savings and saving for a child’s college degree. It is usually recommended to be very clear about these goals so that a portion of the income can be set aside for them every month. While one can expect these goals to change from time to time, including them in the budget makes it easier to commit to them.
4) Build the Budget Plan
This is the step where everything comes together for personal finance budgeting. By this time, one will be aware of the difference between one’s overall expenses and the desired spending. To create the budget plan, start with the take-home income and organize all the fixed and variable expenses. Then, add all saving goals as line items. It also helps if one places spending limits on the various categories. Once this is done, it becomes easier to look at the various aspects of one’s finances. One can see where expenses have to be cut back to pay for essentials or to meet important goals.
5) Choose a Budgeting Strategy
Creating a budget does take some effort. However, much more dedication and discipline are required to successfully follow the plan and achieve goals. Using some of the most popular and effective budgeting strategies and tools can help one stick to the spending limits and savings goals one has decided on.
- 50/30/20 budget: This popular budget planning method is ideal for beginners. It involves dividing the paycheck into three expense categories: 50% for essentials, 30% for discretionary spending, and 20% for repaying debt or savings, whichever is the priority at a given time. The percentages can be tweaked depending on one’s financial circumstances.
- Envelope budget: Multiple envelopes can be used to categorize different expenses. Once the paycheck arrives, fill each envelope with the money assigned to the relevant categories in the budget plan. Once an envelope is empty, no more money can be spent in that category.
- Pay-yourself-first budget: Those who want to save more and don’t want the hassles of keeping detailed records of their spending can use this budgeting method. This method works by keeping aside a fixed amount for savings before any purchases are made or any bill is paid. Once the savings are covered, one can settle the bills. The remaining amount can be directed toward non-essential expenses.