Budgeting 101: How to Create a Monthly Budget
Creating a monthly budget is one of the key steps toward achieving financial stability and achieving desired financial goals. Budgets help track income and expenses, assess spending habits, and consequently ensure the proper allocation of resources. The following are the basics on how to create a monthly budget effectively in practice:
A budget is basically a financial plan indicating how you’ll spend your money every month. It’s a guide in making you know what you spend and save for the right cause. Making a budget increases your awareness of spending money, allowing you to make the right spending decisions. It also gets you ready for some future expenses, does not fall into debt, creates an emergency fund or savings for bigger goals, and many more.
Step 1. Collect Your Information.
To make a good budget, you first need to collect all the financial information you will be using. Some of them include;
-Income Sources: List any source of income, including your salary, bonuses, freelance, or others. It is advisable to use net income-after tax-for a more realistic budget.
- Monthly Costs: List all your fixed and variable costs. Fixed costs are the rent or mortgage, utilities, insurance, and loan pay-off. Variable costs are groceries, dining out, entertainment, and discretionary spending.
Step 2: Categorize Your Costs
After you have compiled your list of income and expenses, sort them into categories. Most people use the following categories:
- Fixed Costs: Costs that you need to pay such as housing, utilities, transportation, groceries, and insurance.
- Non-Essential Spending: All the non-recurring or discretionary expenses about dinner outside, entertainment, and hobby activities, etc.
- Savings and Debt Payoff: Savings in savings accounts, retirement plans, and paying off any loan, credit card, etc.
Once you categorize the spending, you’ll get to understand where you are actually spending your money, and accordingly, you can understand where you could cut back.
Step 3: Create a Budget Based on Those Categories
Set appropriate spending limits on all categories. Take a closer look at what you’ve been spending money on in the past to understand realistic limits. If you find that you’ve been spending too much in a particular area, consider adjusting those limits or trying to cut back in other areas. What you’ll end up with is a balanced budget where your income is matched with your total expenses plus savings.
Step 4: Create the Budget
Now that you have determined your income and expenses, it’s time to craft a budget. There are several tools available to assist you in this process, such as:
Spreadsheet Software: You may use customized, user-friendly Microsoft Excel or Google Sheets.
Budgeting Apps: There are numerous apps, including but not limited to Mint, YNAB (You Need a Budget), and EveryDollar, which make the entire process much simpler.
- Pen and Paper: If you are old school, a simple notebook will suffice as well.
Record your income, expenses, and limits in whatever format you have chosen.
Step 5: Track and Revise
Now that you have a budget in place, keep track of it on a monthly basis. Monitor the inflow and outflow of money throughout the month and try to compare them with your budget. This comparison will help you to identify any areas that need either to be reduced or funds to be reallocated to other places.
Be aware of where you are overspending. Because this is such a general budget, it’s possible that at least one of the limits you set for your spending categories has been broken. All you need to do is go back and revise the budget—just raise the spending limits or cut in whatever other way necessary to stay within the overall budget. Flexibility is needed—life changes, and your budget should too.
Conclusion
Budgeting monthly is very important to become financially healthy and to at least be close to or achieve a few goals. Controlling your finances includes collecting financial information, classifying expenses, setting limits, and monitoring one’s budget. A good budget will not only help in account recording but also train you on the ability to make informed decisions about saving and future investment. As long as time and commitment are involved, budgeting can be a good way of controlling your financial life, which brings further security and peace of mind.