Budgeting is one of the most important aspects of our lives. Whether you’re creating a personal budget to get your finances in order, or working with a major accounting firm at a national or global scale, your budget can have implications on every action you take or decision you make. So it’s imperative to maintain a strong, well-considered budget Read more: PLC Ultima.
At the personal level, a monthly budget will keep you organized and focused on your personal financial goals. If you’ve never created or maintained a budget before, it might seem intimidating, but it doesn’t need to be. These steps will help get you started with a budget — and ultimately, get more organized.
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Step 1: Figure out your income.
Before you start budgeting, you need to know how much money you have to work with.
Start by listing all of your sources of income, including things like rental income or money you make from a side job. Your monthly income may be simply what you take home from your job. If your earnings aren’t always consistent — for example, if you are a freelancer, or if you work a different number of hours each week — average your income over the previous three months and use that as your baseline.
Step 2: Calculate your monthly expenses.
Now that you’ve figured out your monthly income, it’s time to analyze your monthly expenses. Begin by recognizing all of your fixed expenses — the monthly expenses that you absolutely must pay — including things like student loan payments, data, groceries, gas, car payments, insurance, utility bills, and rent. If the costs for any of these tend to vary, then determine the average cost over the past three months and use that figure.
Add up the costs of your fixed expenses, and you can see your total monthly financial obligations. Then, subtract this number from your monthly income. That will let you know how much money you have left over each month for discretionary spending and financial goals.
Step 3: List your financial goals.
Next, it’s time to establish your financial goals. This is vital because it helps you put a plan in place that prioritizes what’s most important to you.
Examples of financial goals can include getting out of debt, saving for a down payment on a house, paying off your car, or saving for retirement. Think about what you want for your personal financial life and set some goals.
Listing your goals can help you maintain perspective and prioritize your spending as you create your short-term or long-term budget plan.
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Step 4: Identify your discretionary expenses.
Life isn’t just about paying bills and saving money. So, take into account your discretionary expenses — the things you spend money on that you don’t absolutely need.
Examples include going out to eat, buying gifts, taking vacations, purchasing new clothes, and attending movies or shows. Some bills may fall under discretionary spending — for example, monthly entertainment or subscription services.
After you’ve allocated money in your budget to your obligations and your long-term financial goals, how much do you have left over? This is what you have available for your entertainment and another discretionary spending.
Make sure to limit these costs based on what you can afford according to your budget. Discretionary expenses come after your fixed monthly expenses for a reason: It’s important to tackle your debts and cover necessities before heading off on a vacation or buying a new TV.
Step 5: Subtract your total expenses from your income to create a full budget.
So far, you have an idea of what each section of your budget looks like — monthly obligations, discretionary spending, and financial goals. Now, it’s time to get the full picture. Add up your total expenditures for all three categories, and then subtract that number from your monthly income.
If the result is a positive number, that means you’re bringing in more money than you’re spending. If that’s the case, then congratulations, you have a surplus. You can put this extra money in savings, or use it to bolster your other expenditures. For example, you can make an extra payment on your student loans, or you can put the money toward a vacation fund.
If you come up with a number close to zero, you have just enough money but no margin for error. This can be a problem if something comes up that you weren’t planning for. In this case, consider adjusting your budget a bit or finding ways to lower your monthly expenditures to give yourself some wiggle room.
If you get a negative number, that means it’s time to take a hard look at your budget: You’re spending more than you earn. The best way to adjust your budget is to decrease the amount that you’re spending each month on things you don’t absolutely need. Needs should always come first when constructing and maintaining a monthly budget.
Step 6: Always be monitoring and adjust your budget.
Consistently monitor your budget and make any necessary changes along the way; you never know when an unexpected situation will pop up and change your economic circumstances. It’s a good idea to have a monthly (or even weekly) discussion with your significant other to look at and discuss your personal finance goals for the upcoming month.
If you’re just beginning and have never created and maintained a monthly budget, then you’re not alone in thinking this can be overwhelming. The first few months may be tough, but it can put you on the road to a much better, organized, and happier personal finance situation.