You’ll need a budget to keep track of your spending and achieve your financial goals. Budgeting is the foundation of better money management and financial planning to avoid financial chaos and crisis at the end of the month. It helps you feel in more control of your expenses, savings, and debts to achieve financial milestones, such as saving for a down payment to buy a new house or building an emergency fund for a secure financial future.
Creating a budget means you know where your money goes each month and where you need to make adjustments to your expenses to meet your monthly financial commitments. In other words, it is the process of monitoring and managing the money flow with a plan to spend money on essential household needs without compromising your financial standing. A budget is solely for the purpose of balancing your income and expenses to secure your future.
How to Create a Budget
While creating a budget may appear to be a difficult task, it is not. There are many ways you can create your budget with some planning and organization skills. You can use a notebook, spreadsheet, or online budget planner to organize your budget. All you need is a template to fill in the numbers of your income and expense. No matter how you fill and track your numbers, here’re the key steps to creating a budget without much knowledge of budgeting and financial planning.
1. Calculate Your Net Income
The foundation of creating a successful budget starts with calculating your net monthly income from all sources. It’s the amount of money you make minus the amount you pay in taxes and other employee benefit programs such as health insurance and retirement plans. It helps you determine the total available money you have to spend on your household needs and other necessities.
2. List Your Monthly Expenses
The next step is to determine where the money is going once you know how much money is coming in. Make a list of all the expenses you expect to incur over the course of a month. To make your spending plans and commitments, try to categorize your expenses into fixed and variable categories.
- Fixed Expenses: Monthly bills such as rent or mortgage, utilities, and car payments fall into this category
- Variable Expenses: Groceries, gas, and entertainment are examples of items that fluctuate from month to month and fall into this category. This is an area where you might be able to cut back to save more. Tracking and categorizing your expenses can help you figure out where you spend the most money and where you can save more each month.
3. Determine Your Average Monthly Spending and Make Adjustments
After listing your monthly expenses, determine how much you spend on each category by looking at your credit card or bank statement to track your spending. It helps you total your monthly income and spending to have an idea on how you are doing.
You’re on the right track if your income exceeds your expenses. This extra cash allows you to allocate funds to other areas, such as building an emergency fund and saving for retirement.
If your expenses exceed your income, you are overspending and should make some changes. Look for areas where you can cut or reduce your spending to meet your budget goals.
These are the key steps to creating a budget without any challenges. After you finish budgeting, the next step is to stick to it. It’s good to track and analyze your spending regularly to ensure that your expenses should not exceed your income. Tracking your spending throughout the month will help you avoid overspending and identify unnecessary spendings.