If you want to control your spending and achieve your financial goals, you need a Personal budget.
A personal budget is a summary that compares and tracks your income and expenses for a given period, usually a month. Although “budget” is often associated with limited spending, a budget does not need to be restrictive to be effective.
A Personal budget will tell you how much money you hope to bring in, then compare it to your essentials, such as rent and insurance, and your discretionary expenses, such: as entertainment or dining. Instead of seeing a budget as a negative, you can see it as a tool to achieve your financial goals.
What Does a Personal Budget Do?
You can plan your monthly spending and savings with the help of a written monthly budget, a financial planning tool. It also allows you to track your consumption habits.
While budgeting may not seem the most enjoyable activity (and for some, it’s incredibly intimidating), it’s essential to keeping your financial home in order. This is because the budget is balanced. If you spend less in one area, you can spend more in another, save that money on a big purchase, build a rainy day fund, increase your savings, or invest in construction to build wealth.
Ultimately, your new budget results will tell you where your money is coming from, how much is in it, and where it’s going each month.
How To Make a Personal Budget in 6 Simple Steps
To create a budget plan that works and allows you to live a comfortable and happy lifestyle, you must first figure out how much monthly money you make. Next, determine how much you spend each month on necessities such as food, rent, utilities, transportation, insurance, and taxes. Finally, allocate any remaining amount towards savings, debt repayment, retirement, or other goals.
Gather Your Financial Paperwork
Gather all of your financial statements, including the following, before you start:
- Bank statements
- Investment accounts
- Recent utility bills
- W-2s and paystubs
- Credit card bills
- Receipts from the last three months
- Mortgage or auto loan statements
You need to have access to all information regarding your earnings and outgoings. Making a monthly average is one of the keys to creating a Personal budget. The better, the more data you can unearth.
Calculate Your Income
What income can you expect each month? If your income is in the form of a regular paycheck, where taxes are automatically deducted, using the net income (or net salary) amount is acceptable. If you are self-employed or have outside sources of income, such as child support or Social Security, include those as well. Record this total income as a monthly amount.
Create a List of Monthly Expenses
Write down a list (in a spreadsheet) of all the expenses you anticipate having during a month. This can include:
- Mortgage payments or rent
- Car payments
- Personal care
- Eating out
- Child care
- Transportation costs
- Student loans
To track your spending, consult the last three months’ worth of bank and credit card statements, receipts, and other documents.
Determine Fixed and Variable Expenses
Expenses that are required but always cost the same amount are fixed expenses. Include car payments, set-fee internet service, regular trash pickup, and mortgage or rent payments. Include the amount of regular credit card payments you make and any other regular monthly expenses for necessities.
It Includes savings and debt repayment as fixed expenses if you intend to save a set amount each month or pay off a set amount of debt.
Variable costs are those that differ from month to month, including:
- Eating out
Start assigning a spending value to every category, beginning with your fixed expenses. Then, estimate what quantity you need to spend monthly on variable expenses.
If you need to know what quantity you spend in each category, review your last two or three months of credit card or bank transactions to form a rough estimate.
Total Your Monthly Income and Expenses
You’re off to a decent start if your income exceeds your expenses. This more money means you can put funds towards areas of your budget, like retirement savings or paying off debt.
If your expenses are over your income, you’re overspending and wish to form some changes.
Make Adjustments to Expenses
If you’re in an exceeding situation where expenses are beyond income, find areas in your variable expenses you’ll cut. Explore places you’ll reduce your spending—like eating out less—or eliminate a category—like canceling your gym membership.
Aim to possess your income and expense columns to be equal. This equal balance means all your income is accounted for and budgeted toward a particular expense or savings goal.
How To Use Your Budget
Your expenses in each category must be monitored and recorded after creating your budget, ideally every day of the month. You can record your expenses and income totals using the same budgeting spreadsheet or app you used to create your budget.
By keeping track of your monthly spending, you can avoid going into debt and spot wasteful or problematic spending patterns. Instead of waiting until the end of the month to record your expenses, take a few minutes every day.
As you utilize your budget, keep an eye fixed on what quantity you spend. Once you’ve reached your spending limit during a category, you’ll either have to stop that variety of spending for the month or move money from another category to hide additional expenses.
Your goal in using your budget should be to keep your expenses up to or below your income for the month.
Review and Tweak Your Budget
Situations alter. Our priorities change as we move, change jobs, and have children. Schedule a meeting with yourself every few months to review your budget and determine whether it still fits your goals and circumstances.
It is simple to experiment with your budget categories to see where you can make extra room or prioritize one thing over another if your numbers already go into a program or website.
Remember that your budget should serve you, not the other way around.
One of the essential steps in creating a Personal budget is calculating a monthly average. Make a note of the total monthly income.
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