Buzz
Creating a monthly budget can help you escape debt and build financial strength. However, setting up a budget is easier than tracking it. To fully benefit from budgeting, you need to track your expenses diligently and adjust your spending habits accordingly. This guide will walk you through the steps to establish a practical monthly budget that aligns with your financial goals.
Steps
Determine what you have
Calculate monthly income. Based on experience, creating a monthly budget is very effective. Therefore, you need to determine your monthly income. Pay attention to net income, the amount you receive after taxes.
- If you work hourly, multiply your hourly wage by the number of hours you work each week. If your work schedule changes, use the minimum number of hours you work in a week instead of the maximum. Multiply 4 approximate weekly wages to get the approximate monthly wage.
- If you work for a certain salary, divide the annual net salary by 12 to determine how much you receive each month.
- If you are paid biweekly, the monthly salary will be based on 2 paychecks, as that is the total amount received each month. This is especially useful if your budget is not much, then twice a year you will receive bonuses to strengthen your savings account.
- If you do odd jobs and have irregular income, average your periodic income over the last 6 to 12 months. Use the average to create a monthly budget, or choose the lowest total monthly amount to set aside for yourself in the worst-case scenario.
List other sources of income. Other income is any money you receive regularly that you don't earn, such as alimony.
- Another example in the U.S., if you earn $200 per month from a side job, your total income is $3,800 + $200 or $4,000.
Ignore bonuses, overtime pay, and irregular income. If you don't rely on some monthly income, don't include it in your monthly budget.
- Fortunately, you receive additional income, which would be a "profit." That is, it's money you can spend on unexpected items (or save for better purposes).
Identify spending
Calculate total monthly debt. One of the secrets to successful budgeting is tracking expenses accurately. This includes debt payments as well as other expenses. Find out how much you have to pay each month for car loans, mortgages, rent, credit cards, student loans, and any other form of debt. Mark each number separately, but also calculate the total to determine how much you owe.
- For example, in the U.S., monthly debt payments might include the following: car payment $300, mortgage payment $700, and credit card payment $200. Thus, your total monthly spending is $1,200.
Track monthly insurance payments. These typically include anything you pay monthly for renter's insurance, homeowner's insurance, car insurance, other motor vehicle insurance, health insurance, and life insurance.
- Another example in the U.S., monthly insurance costs might include the following: car insurance $100 and health insurance $200. The total monthly insurance cost would be $300.
Calculate the average monthly utility costs. Utilities include monthly services you pay to providers, and often include water, electricity, gas, phone, internet, cable, and satellite bills. Keep recent and past bills from last year to calculate the monthly average for each utility, and add the averages together.
- For example, in the U.S., monthly utility costs might include the following: water $100 and electricity $200. The total is $300 for monthly utility expenses.
Determine the average monthly grocery bill. Review grocery receipts from the past few months to determine how much you typically spend each month.
- For example, the average monthly grocery cost for someone in the U.S. might be $1,000.
Pay attention to the cash you've withdrawn previously. Review ATM receipts and bank statements to determine how much you typically withdraw each month. From this, identify how much was spent on necessities versus discretionary items.
- If you kept all receipts from last month, review them carefully and calculate how much you spent on necessities—gas, food, and other essentials. Subtract this total from your monthly cash withdrawals to see how much you spent on wants—new video games, designer bags, and other non-essentials.
- If you didn't keep receipts, try to estimate based on memory.
- For example, in the U.S., if you withdraw $500 monthly from an ATM and spend $100 on groceries, you subtract $100 from the total $500 and explain this as grocery expenses. This leaves $400 in monthly ATM withdrawals.
Calculate special expenses. Special expenses don't recur monthly but happen frequently enough for you to predict. Examples include holiday gifts, birthday presents, vacations, and repairs or replacements you anticipate paying for in the near future. Determine how much you plan to spend on special expenses each month, from January to December.
- For example, you might estimate spending $100 monthly on car maintenance.
Organize the budget
Decide how you want to track your budget. You can use a pencil and paper, standard spreadsheet software, or specialized budgeting software. Software can make calculations and adjustments easier when needed, but it’s also convenient to write down your budget and keep it with your checkbook or credit card as a constant reminder.
- One of the greatest benefits of using software to organize your budget, like a spreadsheet, is the ability to test "what if" scenarios. In other words, you can see what happens to your budget if your monthly mortgage increases by $50 simply by inserting the new increased amount into the "Mortgage" value. The software will instantly check everything and help you visualize how the rising variable value will impact your discretionary spending.
- Bank of America provides a free downloadable spreadsheet template.
Organize your budget. Divide your budget into two basic sections: income and expenses. Fill in each category with the information you calculated earlier, marking a separate entry for each individual income source as well as each expense.
- Calculate the total for the "income" section twice. First, add up all your new income for each month. Second, add everything together, including the money you’ve saved in your account.
- Calculate the total for the "expenses" section three times. First, add up some fixed costs, including debt payments. Fixed costs are also considered necessities or essential needs, although some, like food, vary each month. Generally, these are costs that don’t cause much hardship for a person.
- Second, add variable or non-essential expenses where you can control the amount spent, such as dining out or entertainment.
- Third, calculate the total expenses by adding the two categories together.
Subtract total expenses from new income. To save money, you should have a positive difference. To break even, the two totals need to balance.
- For example, if your total monthly expenses are $3,300 and your monthly income is $4,000, the difference is $4,000 - $3,300 or $700 per month.
Make some changes. If subtracting total expenses from new income results in a negative difference, investigate variable expenses and make adjustments. Cut back on non-essentials like games and clothes. Continue making changes until you have a surplus to break even or save.
- Ideally, your income should exceed expenses, not just break even. Unexpected costs will always arise. That’s an immutable law of the universe.
Try not to let total expenses exceed total income. Sometimes exceeding new income means depleting savings. This can happen if necessary, but it shouldn’t become a monthly habit. However, total income also includes savings, so if you exceed savings, you’ll go into debt.
Maintain a printed copy of your budget. Place it near your checkbook or in a dedicated folder aimed at financial goals. While having an electronic version is ideal, a printed copy ensures longevity, even if your computer is compromised and files are deleted.
Proceed with adjustments
Advice
- Always assume that expenses will exceed income, as people often act contrary to optimistic expectations.
Warning
- Avoid dipping into your savings too frequently. Spending from this fund occasionally is acceptable and sometimes unavoidable, especially during emergencies or unexpected expenses. However, if you plan to use your savings regularly, the funds will deplete rapidly.
What you need
- Pencil
- Financial notebook
- Spreadsheet software
- Budgeting software
- Previous bills and financial reports
