Some people may find the concept of a written budget intimidating. Keeping track of all expenses might seem like quite the chore. Avoiding it altogether can provide temporary relief, but ultimately shirking this responsibility will not serve your financial health. A properly maintained budget is an invaluable tool to help you define and work towards your financial aims, ensuring stability. Spending without a planned budget could lead to unnecessary expenditures, thereby affecting your long-term finances.
Don’t let the thought of establishing a monthly budget trouble you. We have boiled down the process to a convenient five-step guide to help you begin:
STEP 1: IDENTIFY YOUR INCOME
Start by determining your total net income, accounting for all deductions (taxes, health insurance, retirement contributions etc.). This gives you a clear idea of the actual amount that you bring home each month. For those on a bi-weekly pay schedule, remember to account for those two months in the year where you will receive three paychecks instead of two. Treat these as extra income and allocate them to your savings.
STEP 2: DETERMINE YOUR FIXED EXPENSES
Next, enumerate all recurring, non-negotiable outlays—rent/mortgage, utility bills, phone bill, debts, student loans etc. These are necessities you pay for unfailingly each month, the cost of which typically remains unchanged month-to-month.
STEP 3: DETERMINE YOUR VARIABLE EXPENSES
These are regular expenses that vary slightly from month-to-month. For instance, your grocery bills, transport costs, eating out at restaurants etc.
STEP 4: DETERMINE YOUR IRREGULAR EXPENSES
These are sporadic expenses, which might be quarterly or annual. Things like car insurance, car registration, homeowners association fees, or annual memberships fall under this category. Add up these periodic expenses and divide the total by 12. Allocate this amount to a savings account each month to prepare for these intermittent expenditures.
STEP 5: MAKE ADJUSTMENTS
Now that you have identified your income and all types of expenses, you can make adjustments to actively work towards your financial goals. You might realize that certain expenditures are frivolous, or that you are overspending.
Consider this an opportunity to reassess your budget. Examine your variable expenses and discern if any of the items can be cut or reduced. Minimize all other expenses by 10% broadly. Suppose your dining out budget is $200, reduce it to $180. If you were allocating $300 on groceries, trim it to $270. Though 10% may not seem much, it can be shifted towards savings, thus aiding your financial objectives.
AUTOMATE YOUR SAVINGS
Though this is the last step in the process of creating a budget, it is paramount and will be your primary step from hereon. Before making any expenditure at the start of each month, arrange for an automatic transfer from your checking account to your savings account. This step ensures that you consistently contribute to your savings and steadily work towards achieving your financial objectives.
If constructing a budget template seems challenging, use an Excel spreadsheet, find one on Pinterest, or simply use a good old-fashioned notebook. You can also find free budget templates on websites like BudgetsareSexy.com or ChristianPF.com.
Ever found it challenging to maintain a monthly budget? What methodology do you employ for budgeting? Share your experiences with us.
