Whenever payday comes, you burst into happiness as you check your bank account. But by the end of the month, you get confused about where all the money went. This is where having a budget comes in handy.
A budget allows you to track the cash flow of your bank accounts. A budget also ensures that you get to pay for all of your necessities daily while still saving up for your future.
If it’s your first time creating a budget or you want to start afresh, here’s a complete step-by-step guide to managing your money.
👛 What is a budget?
A budget is the first step to making your financial goals happen.
It is simply a spending plan that you will stick to based on your current income and the total amount of expenses. It’s a rough estimate of how you will be dividing up your income to cover your expenses in a certain period.
💳 Why is budgeting important?
Budgeting is essential because it will help you manage the number of expenses you will spend on.
It is only for those who are struggling financially since it anyone can benefit from having a budget. It urges you to live below your means and allow your money to work for you. This way, you can also prepare for the unpredictable events that might happen in your life. You will also then be able to know where did your money exactly go and have better control over your finances.
💵 How to make a budget?
1. Calculate your total after-tax income
The best way to start is by looking into how much you make after-tax. It is crucial that you also don’t forget other sources of income such as rental income, dividends from your investments, and interest from your savings.
If you’re a freelancer or part-timer, you might have a more irregular income.
You can apply this simple math: the minimum number of hours you can work in a month multiplied by your hourly wage. This way, you will have a solid number you can use as a net income, which will be the basis for the following steps.
2. Calculate your total expenses
Begin reviewing your credit card and checkbook statements, shop receipts, etc. The most straightforward expenses to determine are the fixed expenses such as house mortgage or rent and student loans. Meanwhile, flexible expenses are the ones that vary, such as food and entertainment.
Remember not to overlook taxes and insurance since they are paid quarterly or yearly. You can use existing personal budgeting excel templates to help you keep calculate.
3. Set your goals
Now that you have a clear picture of your financial situation, create a list of both short-term and long-term financial goals you want to accomplish through budgeting. This can be starting up your emergency fund, saving up for your child’s education, etc.
Always remember that these goals might change along the way, so they don’t have to be set in stone. Instead, this is a way for you to see your values and the things you prioritize.
4. Craft a plan to adjust your spending habits
Once you have done the steps above, you have everything you need to start your budget.
You can now create your budget categories and determine how much money you will budget for each. Here are some of the common budget categories you may use:
- Fixed Expenses. This includes rent, insurances, subscriptions, utilities, electricity, and internet bills.
- Variable Expenses. This includes groceries, gas, and clothing.
- Miscellaneous. This includes entertainment, date nights, etc.
Since you have documented your income and expenses, subtract them, and you now have a clear view of areas you can cut back. Will it be okay to forego the weekly movie nights and stay at home instead? Can you switch to cooking meals at home rather than dining out? Determine how far you can adjust the numbers and keep track of the amount of money freed up.
In case the numbers aren’t adding up, take a look at adjusting the fixed expenses.
While this will be harder to adjust, this will create the largest wiggle room for your financial goals. Is there a way to downgrade your car insurance payments? How about renting to a more affordable place?
5. Rinse and repeat
Regularly reviewing your budget is key to sticking to it for the long term. This is also a way for you to be accountable that you are staying on track of your financial goals.
It is ideal to also compare your monthly expenses to the budget you have set. If you have spent more than you planned, there might be re-adjustments you need to make to accommodate the expenses you have overlooked. In case you receive a raise, you may make room for your financial goals.
❓ You Might Ask
- How do you create a budget for a beginner?
The key to creating a budget as a beginner is to start tracking your expenses regularly. Through this, you will have a more accurate picture of where your money goes. You can start by doing these:
(1) Jot down your account statements
(2) Subcategorize the expenses
(3) Continue tracking your cash flow
(4) Determine areas you can improve
- What’s the 50 30 20 budget rule?
The 50/30/20 budget rule is a simple template to help jumpstart your budgeting habit. This rule states that you should only spend up to 50% of your income on necessities, 20% of your income on savings and debt payments, and 30% of your income on everything else.
- How do I make a monthly budget?
To make a monthly budget, you need to total your expenses in a month by adding up the fixed costs, non-monthly costs, and contributions to your financial goals. You will have to do simple math by subtracting it from your monthly income. Then, craft a budget that finds the balance between affording your current lifestyle and saving for your future goals.
- How do you create a budget with no money?
When you’re tight with cash at the moment, having a strict budget is the best tool that you can have. Being able to do the correct money management is the recipe for financial stability.
The first thing you need to do is prioritize your bills by setting up an automatic payment schedule. If you have delayed payments, try to call the companies and ask how to catch up to have a positive status. Then it would be best if you got rid of unnecessary expenses.
Everything you cut out must be things you wouldn’t miss having, such as eating out less or switching subscription companies to get a cheaper rate.
- What’s the 70 20 10 budget rule?
The 70/20/10 budget rule works similarly to the 50/30/20. 70% of your income goes to monthly expenses, 20% goes to savings and debt payments, while 10% goes to tithes and donations.