Most people want to manage their finances healthily but do not know where to start; this is where financial planning comes in. Financial planning is essential in taking steps to achieve your financial goals. It involves understanding your financial position by considering how much you earn and comparing it to how much you spend. Budgeting helps you plan your finances and to control your spending. Depending on your needs, you can have a personal or a household budget.
To keep track of your finances, you need a budget. A budget is a ledger used for financial planning in which an individual calculates their expected income against their expenses for some time, either monthly or yearly. Budgeting is often seen as restrictive and unexciting because it involves limiting your spending. While it may be true that it is limiting, a budget needs to work in your best interest; so you can adjust it as you see fit. It would help to balance your income, expenses, and savings for it to be effective and keep your finances in order.
You may budget your finances daily, weekly, monthly, or yearly. A monthly budget is mainly used for monthly expenses and to plan how to reach your long-term financial goals.
This article discusses a monthly budget, why you need one, and how to make it. We also discussed a few budgeting tips that will help you in the entire budgeting process.
Monthly Budget
A monthly budget is a financial plan based on your monthly income and expenses aimed at helping you reach your financial goals.
It is easy to brush off the need for a monthly budget if you can keep track of a few of the necessary bills. However, a monthly budget helps you create an efficient system of tracking all your income and expenses and puts you on a path to reaching your financial goals. In addition, the budget will help you create a plan for your long-term goals as you can set monthly targets that will build up to long-term achievement.
Reasons to Create a Monthly Budget
A monthly budget is necessary for financial planning and saving. Budgets rely on balancing your income and spending every month. A monthly budget should allow you to prioritize different items and bills from month to month. Most people use their monthly budgets to keep track of their monthly expenses, but they can also be used to set and achieve financial goals. Since a monthly budget requires you to check how you use your income constantly, it may help save up for something like retirement or ensure youโre financially stable.
A budget is essential for the following reasons:
To manage and avoid debt
It is easy to fall into debt when you do not keep track of your spending. Budgeting helps you avoid overspending and accumulating credit card debt by ensuring you do not use more than you earn.
To achieve short and long-term goals
Most people set financial goals with their finances in mind, but some forget to plan how to achieve that goal. Budgeting allows you to project and take explicit steps to achieve financial goals and anticipate any emergencies and expenses that might be incidental to achieving your goals.
Encourages you to manage your finances
Budgeting is a process that requires consistency and discipline. Because of the attention to detail and its needs, budgeting will likely make you invest in the process and motivate you to keep track of your priorities.
Important: Please note that a budget is only helpful if the information you use is correct and you are willing to consider all your expenses and income. Therefore, prepare your budget with all the necessary details and be honest about your habits.
Prepares you for critical time
Emergencies are unforeseen circumstances that require immediate action. While you may not know when they will happen, it is good to be ready if an unexpected incident arises and you need to use some money. When budgeting, you put money aside in such situations, which may be handy, especially if you have no source of income.
How to Make a Monthly Budget
A monthly budget should allow you to live comfortably within your means. To do so, you need first to know what you spend and categorize what is urgent and what is not among your expenses while considering your income.
You can follow the following steps when making your budget:
Collect your financial paperwork
Before preparing your budget, you must have the necessary documents containing information on your income and expenses. They include:
- Bank statements
- Investment accounts
- Recent utility bills
- W-2s and pay stubs
- 1099s
- Credit card bills
- Receipts from the last three months
- Mortgage or auto-loan statements
Calculate your income
Now that you have all the documents you need to calculate your income, you can proceed to calculate. Your income should be exclusive of all taxes. If you are employed, for example, and that is your only source of income, your net pay makes up your income. If you have alternative sources of income like child support, include them in your calculation.
Create a list of monthly expenses
From the documents compiled in step 1, you should be able to list monthly expenses. You are advised to use documents from at least three previous months.
Your expenses can be:
- Fixed expenses- Fixed expenses require a standard monthly payment like rent, Wi-Fi, and child care.
- Variable expenses- Variable expenses, unlike fixed expenses, change depending on the number of people and seasons. For example, expenses like gasoline may vary in summer when people are more likely to travel than in winter when people are likely to stay indoors.
The list should include all expected bills, including:
- Mortgage payments or rent
- Car payments
- Insurance
- Groceries
- Utilities
- Entertainment
- Personal care
- Eating out
- Child care
- Transportation costs
- Travel
- Student loans
- Savings
Tip: Spend some time tracking your spending. Your spending habits may change from time to time. It can take a few months to track how much you spend to notice any patterns. There are many ways to check your spending, including using mobile applications where you log in for information or manually collecting your receipts. When budgeting, remember that some expenses require annual payments, such as car insurance payments, vacation costs, doctor and veterinary visits, and property taxes need to be accounted for even though they do not occur monthly. It would also be wise to set aside money for emergencies like car repairs because they may disrupt your budget if they occur and you have no money for them.
Total your income and expenses
Calculate the total of your income by adding all amounts from your sources of income if you have multiple accounts, and ensure you subtract all your taxes. Your total income should be your net income. The total of your expenses should include all your monthly bills and a fraction of any other non-monthly payments, including car insurance or property taxes. You can save extra money for rainy days if your income is higher than your expenses. However, if the income is lower than the expenses, it indicates that you are overspending and need to make adjustments accordingly.
Make adjustments
Where your expenses exceed your income, you should adjust to balance income and expenses. A balanced budget means your income is allocated to expenses and fulfilling your financial goals. In addition, it would help if you considered cutting down on variable costs, i.e., those that do not require standard payment like entertainment.
Review and Track your Budget
You may experience changes that affect your budget. For example, jobs or income changes will affect your income and spending. Because of these changes, you should review and adjust your budget appropriately after some time. Set aside time every six months to check your budget and note any changes.
Because you know how to create a budget, you can look back at steps like making adjustments and identifying fixed and variable expenses. Then, use all the information you need to develop a new budget that works for you.
Monthly Budget Templates
50/30/20 Rule
When preparing your budget, you need to set the financial goals you expect to achieve. There are different ways to make a budget. Recently, the most popular method has become the 50-30-20 model proposed by U.S. Sen. Elizabeth Warren. In this method, you must categorize your income into; needs, wants, and savings, which will account for 50%, 30%, and 20%, respectively. Needs include your fixed expenses like rent, wants to include eating out and entertainment, while savings should include an emergency.
The 50-30-20 rule may not be applicable in every situation. People in low-income households are an exception because they may need to allocate more income to needs than wants. An exception may also be made for wealthy families that can afford to save more than the stipulated 20%. Your monthly budget needs to work for you; while you may want to follow this rule, you should make adjustments if they will work better for your financial situation and goals.
Budgeting Tips
You should change your budget from time to time, especially when there is a change in income or expenses. You may use the following when preparing your budget:
- If you work on commission, work to save more for when business slows down.
- If you are paid monthly, allocate money each week and keep it in a separate account to ensure a steady cash flow during the month.
- Where you can, use cash instead of a credit card because credit card expenses accrue interest.
- Adjust your budget as you deem fit if you made an error when calculating your expenses.
- If you cannot control your spending, consider using hacks like cash-only to ensure you have a steady cash flow during the month.
- Consider saving more if you have successfully budgeted and your income is now higher than your expenses.
- Work on improving your financial literacy by learning more finance skills.
- Distinguish between luxuries and necessities, and where you have to cut down on spending, consider spending less on luxuries.
- Track how much you spend on seemingly small items like take-out coffee.
- Do not spend more once you get an extra source of income; use the money wisely by saving more before you adjust your budget upwards.
- Manage your debt by paying towards clearing your credit card debt monthly. Where you cannot manage your debt, consider debt consolidation programs that help you lower your interest rates.
Frequently Asked Question
How do you account for financial goals in your budget?
Financial goals should be part of your savings. For accountability, calculate how much you need to reach your financial goal and set a target within a specified time, maybe 12 months. At the end of 12 months, you can tell whether youโve achieved your financial goal.