Like most people, you may have thought of creating a budget but do not know where to start. You may also have a budget, but it does not work for you. If you decide to change your financial situation, the best place to start would be to make a monthly budget, which is one of the most popular and convenient.
A monthly budget helps you organize your finances and create healthy financial habits. Moreover, monthly budgets help you to record your income and direct it to your most essential needs; therefore, you can control your finances. Furthermore, an adequate budget helps you achieve your monthly goals, whether it is repayment of debts or saving for a personal project. A budget is convenient for most people because monthly bills and salaries are paid. An adequate financial budget helps you make better financial decisions and save for emergencies.
This article discusses what a monthly budget is and highlights that:
- A monthly budget helps you categorize your income and expenses and to understand your financial situation.
- Your budget should help you evaluate your spending and record your highest expenses.
- Monthly budgets should be adjustable to fit your needs. Of course, it takes time to develop a solid budget, but even then, the budget should be flexible.
- Budgets should be reviewed once a significant change occurs, like an increase in income or a medical emergency.
What is a Monthly Budget?
A monthly budget is an account of your monthly income and expenses.
A proper budget can result in clearing debts and increasing investments. The budget should also aid you in prioritizing your needs and cutting down on unnecessary expenses. A personal budget identifies all your sources of income, like salary, tips, and bonuses, and your expenses, like debts, water bills, electricity bills, and food expenses.
How Does It Work?
Monthly budgets help you plan your income and expenditure for the day, week, and month. They allow you to identify your expenses and allocate money for them. From the allocation, you can identify your most significant expenses and evaluate whether they are necessary or not. The budget can also identify your impulse expenses, and you can plan on how to reduce impulse buying.
Once you have a monthly budget, you can set and achieve long-term and short-term financial goals. Budgeting allows you to allocate money for investment, saving, and even retirement. In addition, short-term goals like saving for gym equipment or remodelling can be achieved with effective monthly planning.
Monthly budgeting is one of the ways of developing healthy financial habits. Because it requires consistent evaluation, you will work towards short- and long-term goals, resulting in financial discipline. In addition, proper budgeting will help you make a plan to clear debts, save more, and plan for retirement.
You can calculate your budget using a journal, a writing pad, or a spreadsheet. You can also use mobile applications and your bank’s budgeting tools. Applications are a digital way of creating your budget; you can subscribe to a paid service or download a free application, log in with your details, and create your budget. Spreadsheets are more straightforward, do not require you to log in, and can use them wherever you are.
Things to Know Before
Before you create your monthly budget, you should collect all your financial information and documents to avoid miscalculating or missing crucial information.
Some of the things you should know before making your budget include:
Your income
Income is the money you expect to receive from your sources of revenue. It includes salary, tips, and money from investments. For a monthly budget, income should be the amount of money you expect to receive monthly after deducting taxes and mandatory payments.
Your expenses
Expenses are the costs incurred to acquire something and the items that must be paid for. Some expenses you should know before creating your budget are utilities, transport, and personal care costs. They can be classified into fixed and variable expenses. Fixed expenses are costs that remain the same every month, while variable expenses change from month to month.
Your savings and debt reduction goals
Savings are income set aside for future use. Before making your budget, set a goal for how much you want to save and set a timeline to achieve the goal. Next, determine your debt and set a goal on the amount you should repay within a particular period. Once you set these goals, you can plan how to achieve them by allocating them to your monthly budget. Your savings, debt repayment, and retirement funds should collectively take 20% of your income.
Note: A rainy-day fund is money set aside for emergencies. Most people use rainy day funds when they lose their jobs or source of income. A typical rainy-day fund should amount to three to six months of living expenses. The fund could be kept in an emergency savings account with high-interest rates.
How to Make a Monthly Budget?
Once you have gathered all your financial documents on income and expenses, including receipts and bills, you can make your monthly budget. The following process can help you make a comprehensive budget:
Choose your categories
The two major categories in your budget should be income and expenses. You can subdivide your categories depending on your sources of income and expenses. For example, your income may be from wages, salary, interest, and business profits. Expenses include grocery bills, rent or mortgage, and loans.
Track your spending
Once you have all your categories, you should account for your incoming and outgoing amounts. Tracking your spending helps you organize your budget and recognize unhealthy financial habits. You can track your spending by identifying the following:
Take home pay
Your take-home pay is your net income. It is the remainder of your income after deductions like taxes and pension payments.
Extra income
Extra income is money earned from sources other than your job. It includes money from side hustles, alimony, and tax returns. If your extra income fluctuates, calculate the average monthly amount.
Monthly expenses
Monthly expenses are for recurrent bills. They include expenses like rent and utilities. These should be prioritized because missing a monthly payment could affect the other payments for the rest of the year.
Irregular costs
Irregular costs are expenses paid yearly, bi-annually, or on an as-needed basis. They include property taxes, insurance premiums, and health expenses.
Wants
Wants are expenses that help you live comfortably but that you can do without. They include eating out, entertainment, and travel. While they are not necessarily bad, they may cause you to spend impulsively. It is, therefore, crucial to identify your wants to make proper plans.
Set your financial goals
Now that you have all your income and expenses, you should know how much you have left over for items like the emergency fund and savings. Your financial goals should be achievable within a particular period.
Do you know? According to debt.com, budgeting has become more popular, increasing to 86% in 2022 from 70% in 2019 before the pandemic. In addition, one-third of the survey respondents stated that they use spreadsheets to make a budget.
What’s Next After Making a Budget?
After making your budget, you should evaluate its effectiveness according to the financial goals it was meant to achieve. Finally, you should implement the budget by paying your monthly bills, depositing the specified amount into your savings account, and checking against your goals.
The budget should help you understand your spending habits and evaluate where you spend more than the necessary amounts. The budget may also indicate where you spent more than you allocated. Such observations may be considered when creating the next monthly budget. You may also discover amounts that need to be adjusted for inflation or where you underestimated the amounts. A continuous evaluation may lead to better spending habits and even more savings.
Monthly Budget Templates
A template is a worksheet that helps you create a budget for your monthly income and expenses. The template helps you compare the amounts in the budget against your income and to gauge your financial situation. Templates also help you avoid making mistakes when calculating your income. They guide you on all the necessary aspects of a budget. They are also customizable and easy to use, compared to when you have to create a budget from scratch. We offer free, downloadable monthly budget templates for your use.
Templates offer the following advantages:
Visualize your budget
A template gives you an idea of what your budget should look like. It helps you identify specific expenses and categorize them when planning allocations. In addition, since they are structured, the sections can be compared against each other to establish whether your income and expenses are balanced or not.
Aids in long-term financial goal planning
The monthly budget template helps you set long and short-term financial goals. An adequate budget can help you achieve long-term goals if you break them down into achievable monthly goals. Including these goals in monthly planning eventually leads to your success. Your monthly budget can also help you evaluate your annual spending.
Helps you track minor details
A template aids in identifying minor details that affect your financial health. These details may go unnoticed without a template to compare the figures. In addition, evaluating the minor details may help improve your decision-making skills in future budgets.
50/30/20 Rule
The 50/30/20 rule is a strategy that requires you to allocate 50% of your net income to needs, 30% to wants, and 20% to investments. It is a strategy to ensure you allocate most of your income to basic needs while contributing to savings and investments.
Since the strategy is simple enough, it can be used by almost anyone who wants to use their money efficiently while preparing for future emergencies. Needs include bills that must be paid, wants to include activities like dining out or buying new clothes, and savings contribute to emergency funds and investments. You do not have to follow the 50/30/20 rule strictly; you can adjust the ratios to suit your needs. For example, if you have sufficient income and investments, you may increase the ratio for your wants and reduce how much you allocate to your savings.
Budgeting Tips
When making a budget, you should research widely to get as much knowledge as possible on the best ways to make your budget. The following tips can help you make a comprehensive budget:
Make a plan
It is essential to make a plan to help you achieve your goals. First, evaluate your goals, for example, to save X money in three months. Then, calculate how much money you will need to set aside from your income to achieve that goal.
Organize fixed and discretionary expenses
Fixed expenses are those that cannot be easily changed. For example, they include rent and car payments. On the contrary, discretionary payments change depending on dependents and seasons; they include expenses like entertainment and groceries. Identifying the differences between these expenses can help you allocate the most appropriate amounts for each expense.
Examine cash flows
Your income and expenditure determine your cash flow. In an ideal budget, the income is more than the expenditures to ensure a balance. Therefore, examining your cash flow allows you to determine how much extra income you have.
Adjust payment schedule
Your monthly payments should be timed appropriately to avoid extra charges on your bank account. The amount in your account should always be more than your expense to avoid overdraft fees.
Let yourself fail
Proper budgeting takes experience. If you are creating your first budget, do not be afraid to fail. Instead, evaluate your budget and identify the mistakes you could have made. For example, you may identify the mistakes by evaluating each category and establishing where you overspent and did not allocate enough money. Then correct those mistakes in the next budget.
Use a template
Templates are a useful tool, especially for starters. You should use a template to guide you on how to structure your budget and calculate the income. The template will also help assess your financial habits.
Frequently Asked Questions
What is a balanced budget?
A balanced budget is when the income equals or exceeds the expenditure. To achieve this, you may use a zero-based budgeting approach where all the income is in savings or expenditure.
How can budgeting impact your overall wealth?
Budgeting can be used to set and achieve long-term financial goals. Effective budgeting also increases savings and reduces debt over time; this leads to an increase in money that can be used to invest in increasing your wealth. Budgeting can also help you increase your wealth by controlling expenses and creating a concrete path to achieving your financial goals. With budgeting, you can focus on saving for retirement.