Budget forms the primary step before you can manage spending and focus on financial goals.
A household or personal budget sums up, tracks, and compares your incomes and expenditure for a defined period, generally one month. Budget is always associated with controlled spending but it does not have to be like that to decide its effectiveness.
A budget summarizes how much money can bring in, followed by comparing that to your actual expenses such as a mortgage, rent, insurance, and your discretionary spending such as eating out shopping, or entertainment. The budget in the right sense must be viewed as a tool to achieve your financial goals.
What Is A Budget For A Layman?
We come across the word ‘budget’ in our daily lives and very few get the meaning right. Planning a monthly budget is adhering to a routine and strict methodology to balance how much you will be spending or saving every month. Tracking your spending habits is achieved only by proper budgeting.
The very mention of making a budget can put off somebody instantly as some may feel it is a waste of time or a restriction to one’s freedom of spending or enjoyment.
A budget is successful only if you are sincere, committed, and dedicated to respecting the expenses and your income. In a nutshell, the budget gives you an insight into your inflow of money, what is left, and where it ends up each month.
Ways to Make a Simple Budget
Firstly, fix a good template to fill in and track the numbers of your income and expenses. The traditional pen and paper are a common way of recording things but if you are a techie then go for a spreadsheet or a budgeting app for a monthly budget.
1. Bring On The Financial Paperwork To The Table
Collate all your financial statements, including:
- Recent utility bills
- Investment accounts
- Bank statements
- Receipts from the last three months
- Loan Statements
2. Evaluate Your Income
What are the sources of income each month? Generally, if you are salaried with a regular paycheck then the taxes are deducted automatically and are credited to your account. The net income or take-home pay needs to be considered for the budget. If you have your own business, a freelancer, working on daily wages, or are self-employed it means you should take into account the baseline income or the lowest-earning month.
3. List Your Monthly Expenses
Jot down all the expenses that you have or may expect during a month which includes:
- Rent or Mortgage payments
- Car loans
- Daily utilities
- Eating out
- Transportation costs
Now, go back to your bank statements and receipts from the last 3 months to identify the listed spending or expenses.
4. Determine Your Expenses
Fixed expenses are by default mandatory and are recurring and paid accordingly each time. If you want to keep aside some money to pay off debt each month, then include savings as well. If you are seeking help from an emergency fund to manage fixed expenses then it helps in diverting the savings to fixed expenses.
Variable expenses keep changing every month, such as groceries, gas, hanging out, ordering food from restaurants, gifts, and so on. These expenses can still be checked as it depends on an individual’s habit and decisions. Wait what if there is an unexpected or surprise expense that pops out from nowhere and simply puts off your budget plans?
Assigning a spending amount to the respective category of fixed expenses allows you to estimate the actual spend per month pitting against variable expenses.
5. Monthly Income vs. Expenses
When your income is higher than the expenses, you deserve a pat on the back. This extra money can be utilized for paying debt and retirement savings.
If the expenses are exceeding the earnings it clearly indicates overspending and a lack of commitment.
6. Fine Tune Your Expenses
Fixed expenses are something that you really can’t do much and it is the variable expenses that you need to work on like cooking at home, planned shopping, etc. Aim to match the income with expenses and the job is pretty much accomplished and hence your budget towards a specific goal is achieved.
Monitoring Your Budget
Setting up a budget is to get you on track and what follows next is the continuous monitoring to track your expenses every day of the month. Spare a few minutes to update your daily spending even if it’s not significant because it helps in identifying unnecessary expenses.
Ultimately, your main goal is to use your budget to keep your expenses equal to or less than your income per month.