Making a budget
If you aren’t sure if you can afford that new car that you’ve had your eye on or that trip that you are itching to plan, you need to create a budget to clearly outline money coming in and money going out.
Making a budget is an important step in managing your finances. To create a budget, determine your monthly income, list your monthly expenses, categorize expenses, track your spending, create a budget allocating funds for fixed expenses, variable expenses, and savings, stick to the budget, and review and adjust regularly. By following these steps, you can gain control of your finances, avoid overspending, and reach your financial goals.
Step 1: Figure your net monthly income
What does net income even mean? Simply stated this is your take home pay. You need to take your hourly wages or salary for a given pay period and subtract taxes and other fees taken out of your check such as insurance and retirement places. Once those deductions have been taken you are left with your net income, and this will be the starting number to create your budget around.
Step 2: Write down your areas of spending
If you are a digital person, using a spreadsheet on the computer is a smart idea when planning out a budget. There are always new line items to add, delete or change. Certain irregular expenses are also easy to forget, but important to add into the budget once recalled.
For those who like to have a hard paper copy, a budget planner is a must have! Look for an updated planner, which allows you to start at anytime throughout the year, such as the feature-filled planner below.
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Here are a few examples of line items you may need to include on your expense sheet
This list will be different for everyone, so it is important for you to take the time to customize this to what your actual expenses are.
You will notice the last suggested budget category above is cash. This is a line item that everyone should have. Those quick trips to the ATM or cash back at the register can really add up. Even cash purchases need to be budgeted for. Use a budget binder cash envelope system for simple tracking and organization of your dollars.
Step 3: Estimate how much you spend each month per line item
Now that you know what you are spending your money on, it is time to estimate how much you are spending on each expense every month. Most of the time this will be an average number except if it is a set bill that doesn’t often change such as mortgage or rent payment. A helpful hint is to look back at past months expensive to make an educated estimated guess. For example, if you spent $425, $576, and $409 in three consecutive months for groceries, add those three numbers together and divide by three to get your new budgeted number for groceries. In this case your monthly allowance would be $470.
Step 4: Are you living within your means?
Add up your estimated expenses and compare this today to your new monthly income figured out in step one. You should be spending less money than you are bringing in. If you are spending over your net monthly income than you are overspending and need to trim your budget. If you are spending way under your monthly budget this is a good time to establish or add to personal savings or retirement account.
Step 5: Trimming your budget
If you are like the majority of people on the planet you are projected to spend more than you are bringing in for income. If this is the case, then you need to go down the line items of your budget and write (W) want, (S) savings or (N) need. This is the perfect time to implement the 50/30/20 rule.
The 50/30/20 rule is a tool used to help divide your net income into three categories of spending.
Rent or mortgage
Travel and Vacations
Savings or Debt
Emergency “rainy day” fund
Child’s college fund
Credit card payments
Look at each (W) want item one by one and see if there are any items that can be eliminated entirely. Examples of this may be if you have three streaming services, but only use one on a regular basis. Cancel the other two that aren’t used often and remove them from your budget entirely.
Once you have gone through the (W) wants and removed or lessened the amount allocated towards them, recalculate, and see if you are within your income guidelines now. If you have managed to stay within budget, fantastic! If you are still projected to spend over, it is time to look at your (N) needs and see if you can spend less than you are currently spending.
While this may seem difficult to do many times there is some wiggle room in a lot of areas of required expenses. Let’s take mortgages for example. Many people refinance their mortgage to secure a lower monthly payment. You can shop around and compare rates for homeowners, medical, dental, auto, and vision insurance. Try shopping at a different grocery store that offers the same products you shop for at a lower cost.
(S) savings is a category that many people sacrifice completely. It is hard to cut back on things that you want just to save for a day long down the road. Savings is an important category to budget for and should not be pushed aside and neglected. Rework your budget if you did not originally have a place for savings. You are never too young to start putting money aside for your future.
Step 6: Check your budget quarterly
Life happens fast. Things change. Chances are high that prices will change, you’ll add new expenses, change jobs, etc. Make sure that you grab your calculator, and are checking your budget a few times per year and making adjustments where needed. It is important that you stay on top of this, or you could end up getting into financial debt before you realize that you are.
Bless Myself Blog
Certified Life Coach, Mother of Five, Wife, Christian, Homeowner & Friend