If your spending needs to be controlled, then you have to learn more about how to make a budget so as to work towards achieving your financial goals.
A budget, either personal or household, is a summary that tracks and compares your income and expenditure for a period of time, usually one month. Although the word “budget” is sometimes associated with spending that is restricted, in actual fact, an effective budget doesn’t have to be restricted.
A budget is usually a representation of how much income you are earning compared to your needed expenses, such as a rental fee or insurance premiums, and your discretionary spending such as eating out or entertainment. A budget can be viewed as a needed tool to achieve financial goals instead of seeing it as a negative agent.-
How to make a budget in 6 easy steps
Good control of what you are currently spending, what you can really afford to spend, and what your scale of preferences are, need to be perfectly handled in order to create a budget that really works and that will allow you to live a happy and comfortable life.
How to make a budget is better made if a good template is found and can be used for filling in income and expenditure numbers.
Although, old-fashioned paper and pen can be used to make a budget of your money, using a budgeting app or a monthly budget spreadsheet is easier and more efficient. These will have designated fields for different categories of income and expenditure, and some built-in formulas to assist you in figuring out your budget surplus or deficit with minimal effort.
Simple steps on how to make a budget
your financial paperwork:
All your financial statements must be gathered together before you begin, the statements may include:
- Investment accounts
- Bank accounts
- W-2s and paystubs
- Credit card bills
- Mortgage or auto loan statements and
- Receipts from the last 3 months
You should have easy access to your income and expenditure information, the more information you can gather, the better. One major crucial step in the budget-making process is to create a monthly average.
A net income (or take-home pay) amount can be used if you get your income from regular paychecks where taxes are deducted automatically. But if you have other outside sources of income such as social security or child support, or you are self-employed, including these is fine as well. This total income should be recorded as a monthly amount.
You should consider using the income from your lowest earning month in the past year if you have a variable income, such as income from a freelance or seasonal job, as your baseline income when setting up a budget.
List out monthly expenses:
All the monthly expenses you are expecting to have during the month should be written out on a list. The list could include:
- Car payments
- Mortgage or rent payments
- Personal care
- Eating out
- Transportation cost
- Student loans
- Child care
All these spendings can be identified by using the last 3 months’ bank statements, credit card statements or receipts.
Fixed and variable expenses should be determined:
Compulsory expenses that the same amount is paid for each time are called fixed expenses. Items like rent or mortgage payments, internet service fees, car payments, trash pickup, and regular child care. If a standard credit card payment is made, the amount should also be included and any other amount that tends to stay the same every month.
If a fixed amount is planned to be saved or used for debt repayment, these should also be added as fixed expenses.
Any expenses that the amount does not remain the same every month is known as variable expenses, which may include:
- Eating out
A “surprise expense” category for saving funds for an emergency, which may arise over time and derail your budget.
A spending value should be started to be assigned to each category, starting with your fixed expenses. Then the total spending on variable costs every month should be estimated.
If how much you are spending in each category is not surely known, then your last 2 or 3 months bank or credit card transactions should be reviewed to make a rough estimate.
Totaling your monthly income and expenditure:
If your expenditure is lower than your income, you are on the right track. It means there will be extra money that can be put towards some budget areas such as retirement savings or debt repayments.
A 50/30/20 rule of the budget should be adopted when your income is greater than your expenses. The explanation of the rule is that important needs or essential expenses should cover 50% of your budget, wants should cover another 30% and the final 20% of your budget should be used for debt repayments and savings.
If you are dealing with a budget deficit or your expenditure is greater than your income, it means you are spending more than your limit and some changes should be made to your expenses.
Making changes to expenses
An area that you can cut down is your variable expenses should be found and controlled if your expenses are more than your income. Areas like eating out or canceling your gym membership, for example, can be used to adjust the expenses.
Cutting down your variable expenses may not be enough if you have significant debt or your expenses are far more than your income. Your fixed expenses may also need to be trimmed down and find a way to increase your income in order to make your budget balance.
Aim to have a balanced budget, where your income and expenditure columns are equal.
This balanced budget simply means that all your income has been used for achieving expenses or savings goals and is fully accounted for.
What does a budget do?
A budget is a written monthly financial planning tool that allows you to plan on how much you want to save or spend every month. It also enables you to control your spending habits.
Although the habit of budget-making may not seem like the most exciting activity and may be scary to some, it is a crucial part if you really plan to keep your financial life in order.
This is because having a budget can help you spend more in one place if you spend less in another area. It can also allow you to save more money, have an emergency fund or start investment to build wealth by making your money work for you while you sleep.
In order to make your budget works, you have to be honest about your income and expenditures, and you must be ready to accurately work with detailed information about your income and spending lifestyle.
Finally, your new budget will show you where your money is coming from, how much is it, and how you spend it each month.
How a budget is used
After a budget has been set, proper monitoring and tracking of expenses in each category should be put in place, ideally every day in the month. The same budgeting app or spreadsheet that is used in making your budget can also be used to record your income and expenditure totals.
Recording and tracking your spending throughout the month will guide you against overspending and help you in identifying and controlling unnecessary expenses or problematic spending habits. A few minutes should be taken each day to record your expenses rather than delaying them till the end of the month.
The envelope budgeting system can also be adopted if you are not confident about budgeting your money, where cash is divided into different envelopes for each spending category. So when the particular envelope of a category is empty, then spending is stopped for that category.
An eye should also be kept on your budget as you are using it, immediately your spending limit is reached for a particular category, spending on that category can either be stopped for that month or transfer money from the envelope of another category to make up for the additional expenses.
When using the budget, your goal should be to have a balanced budget, where your income is equal to your spending, or have a surplus budget where your income is greater than your spending every month.
Tweaking and reviewing
Priorities may change when circumstances arise, such as changing jobs, relocating, having children, and so on. An appointment with oneself should be made to sit down and review your budget to make sure it is perfectly working for your goals and realities.
If your numbers have already been plugged into an app or a website, the budget categories can be played with to see which category can be used to create extra space or to prioritize one thing over another.
Always remember that your budget should always work for you and not the other way around.
Tips on how to make a budget
Your budget should be customized according to your goals and financial situation, once it is set up.
- Your savings should be increased aggressively if you work on commission so as to cover up for the slow market periods.
- If you are paid once in a month and have cash flow issues, divide the cash by weeks and only spend cash meant for that particular week while saving the rest in a separate account until the week to spend them comes.
- Avoid owing interest on top of anything you buy by paying with a credit card only if the money to pay it off will be available by the end of the month.
- Make an adjustment to your budget if you notice you have underestimated or overestimated your expenses. Keep track of your of large expenses that occur every few other months, such as insurance premiums or payments.
- Use budget hacks to control overspending in certain categories, such as changing to a cash-only budget.
- Once you have a surplus budget where your income is greater than your expenses, plan towards saving goals before increasing your spending.
- Create free periods to learn more about other financial skills so as to improve your financial literacy and make your money work for you