Preparing a budget is a great way to trail where the money goes every month and an important step to getting the finances in command. A budget can make it easier to achieve financial milestones, such as building an emergency fund or saving for a down payment on a future asset.
While the task may seem intimidating, it’s not that complex to create a budget. In case of improving the financial health, preparing the budget will surely be helpful. Budgeting helps to better understand how to spend money and shows to manage your money to pay the debt faster or save for future financial goals.
The first step is to find out how much money you make each month. You’ll want to calculate your net income, which is the amount of money you earn after the deduction of all the taxes. Eventually, you want to end up with a plan that specifically breaks down your income and expenses, so you know how much you can spend and how much you can save each month.
Step 1: Monthly income
If you receive monthly fixed income from the employer with taxes automatically deducted, your monthly income is the net amount you have received in your pay-check which is also called net income. If you have multiple job, sum up each net pay for each job to find out the total monthly income. If you’re self-employed or have outside sources of income, such as interest on fixed deposit, dividend on shares or parental assistance, record the exact amounts you receive every month.
Step 2: Fixed expenses
Many expenses are fixed every month and you pay the same fixed amount each month. For example, rent, mortgage, telephone bill, loan repayment etc. These are easy to list out because you’re paying same amount every month unless you’ve piled up late payment fees by not paying it on time. To stick with your budget, it helps if you pay all the bill on time.
Step 3: Variable expenses
Some of your monthly bills vary like electricity and gas expense changes based on the season. Other varying expenses each month include groceries, medical expenses, personal care, school trips for children that need replenished. It would be good idea to review past three to six month of bank statements or credit card statements to track such expense and then plug the amount into
Once you know how much you expect to earn and spend monthly, create your monthly budget. Start big, and then get more specific in areas that vary and could upset your overall budgeting plan.
Step 4: Budget for wants
The initial part of the budget should always cover your needs. What’s left over is split between the things you want and your savings. Wants can include all the leisure expenses such as holidays, shopping, presents, dining out etc. However, some things, such as food, can fall into both the needs and wants categories. To budget for your specific needs and avoid overspending, keep track of how much you spend on groceries over a three-month period and calculate an average to use in your monthly budget.
Step 5: Make adjustments
If your budget shows the expenses outweigh the income, try to find the ways to cut down on the expenses. This doesn’t mean you can’t go out and have fun, but you may need to limit your spending to make your budget work. You may also cut the expenses and get control of your finances is to see if you can lower the cost of certain services. For example, move to a cheaper utility’s provider or mobile phone provider etc.
Step 6: Budget for loans
Paying for college can be difficult, they’re going to be part of your budget for a long time. Never take out more student loans than you need to pay for your school expenses. Consider refinancing high-interest Make adjustments loans, and make extra payments when your budget allows to get out from under your student loan debt sooner.
Other than buying a home, buying a car is one of the biggest purchases you’ll make. Before taking on an auto loan, ensure the payment fits in your budget. Go to different financial providers for the home loans or any auto loans and compare the interest rate, administration charges, early repayment charges etc before finalising the loan. You may end up with huge saving just by looking different loan providers.
After creating a budget, the next step is to stick and follow it. You can hold yourself accountable in a variety of ways. For starters, you can set reminders with the credit card and bank accounts when you reach a pre-set spending amount. Also, you should also try tracing all of your expenses after you make a purchase. With the right planning and frequently reviewing the figures, budgeting helps to stay on top of expenses. If you’re still having trouble making your monthly payments after creating your budget, look closely at the finances to learn why you’re overextended.