Let me share with you the magic that can happen with your finances when you actually sit down to look at your financial status, plan your spending, and learn how to establish a budget that suits your funds and your lifestyle, before the idea of creating a budget makes your eyes glaze over.
But first, what exactly is a budget? A budget increases financial awareness and self-assurance. Knowing your financial limitations will allow you to take control of your money and start making adjustments like paying off debt, making investments, or creating financial security.
By allowing you to direct your spending toward the things that will make you feel the happiest, a budget also enables you to lead the life you desire. A budget merely orders your spending on the things that important, not that it places restrictions on you. This way of thinking about a budget can really be incredibly liberating.
Do you want to know more about creating a budget? Continue reading for our step-by-step instructions, along with advice on how to succeed.
How to Make a Budget: Step-by-Step
Although budgets come in many sizes and shapes, the fundamentals remain the same: choose a time frame and list your anticipated earnings and expenses. Next, compare the two figures. I hope the difference won’t be detrimental. If it is, then keeping to a good budget becomes quite important. To create a simple budget, follow these three steps:
1. Calculate Your Income
First, let’s figure out our revenue. Income is essentially any anticipated influx of money into your life for budgetary considerations.
Write down all of your sources of revenue for the current time frame (we’ll use a month for this example) in order to determine your overall income.
Examples of income that can be used in budgeting include:
- either a job or a business’s earnings
- a salary
- both child support and alimony
You’ll need to determine your income in a somewhat different way depending on your work and pay structure in order to construct a personal budget that appropriately reflects your monthly revenue. Use these suggestions as a guide:
- If your job income fluctuates, review your last six months’ worth of pay stubs to get a close estimate of your monthly income. Throw out the highest month, total the remaining five, and divide by five to get your average. Use that number going forward in your budget.
- If you’re just starting with a new salaried job, take your expected annual salary, reduce it by 20% (for taxes) and divide by twelve.
- If you’re a commissioned based employee, ask more experienced coworkers what to expect, and use the most conservative income you can handle in your budget. But don’t forget to also have a plan if that extra money does come in.
If you work as a commission-based employee, find out what to expect from more seasoned colleagues and use the most cautious income you can in your budget. But remember to also have a strategy in place for when that extra cash does come in.
Underestimate your revenue if in doubt. Don’t worry too much about getting this perfect the first month; you can fine-tune it afterwards. It’s crucial to keep in mind that a budget is a dynamic document and should vary as your financial situation and personal circumstances do.
A budget is wonderful because it may be changed from month to month based on real outcomes and your shifting circumstances. Calculating your income will actually be simple if you enter these data into the Mint budgeting application because you can automatically import your checking account data to track incoming funds.
2. Identify Expenses
It’s time to decide how we’re going to use that money now that we’ve determined our revenue. Make another list now.
This time, we’ll make a list of every anticipated outflow. Savings, giving to charities, taxes (if you haven’t deducted them from your income already), living expenditures, and, of course, entertainment costs are some examples of expenses.
Budgeting 10% to 20% of your income for savings (pay yourself first! ), another 10% for charity, and then covering your regular monthly expenses, such as rent or mortgage, utilities, loan payments, insurance, and other services you must use each month, is a solid general rule to follow.
Finally, make a list of all of your extra costs, such as travel, entertainment, and dining out.
Examine your past expenditure to come up with reliable estimations for each of your spending categories. Again, since you’ll be able to transfer your data from past months, using a budgeting service like Mint can be incredibly useful in this situation. When in doubt, estimate your costs too high.
3. Determine: Is it Positive or Negative?
- The big moment has here. By deducting your predicted expenses from your income, you can compare your total expected income and total expected expenses.
- If you discover that your overall spending are higher than your income, you’ll need to cut back on some of your expenses in order to survive the month.
- Start with the things you can control the most, but don’t be hesitant to attack bigger things as well.
- If you find that you have extra money in your budget, you can put it in any area you like for spending or saving.
- More savings is desired. Increase the percentage of your savings. Want to go on more trips? Boost that classification. The great thing about a budget is that it influences how you live your life.
- At the end of the month, make sure to compare your budget to actual spending to see how you performed.
- You’ll discover that you spent more in some places than you anticipated and less in others. After making the necessary changes for the following month, proceed.
Budgeting Tips: Sticking to It
- You now understand the fundamentals of creating a budget, but for many individuals, maintaining a budget is the challenging part. Some people genuinely enjoy monthly data analysis, but others will never want to do this.
- The process of classifying the expenditures from the previous month and making forecasts for the subsequent month is tiresome, despite the fact that online programmes like Mint undoubtedly make your life easier.
- Change to a quarterly or bi-annual review if you find it difficult to remain with it each month.
- Over the years, I’ve learned that it’s crucial to simply make sure that I always take care of our budget’s most crucial items first.
- My primary priorities are giving and saving money. As soon as money enters our checking account from an income source, we make sure to automatically save and gift.
- As long as we stay within our means, what happens to the rest of our budget is less significant (i.e. not going into debt to support our spending).
In conclusion, give yourself some time to identify the most significant aspects of your life. Then make a budget to guide your spending on those items.
Important Lessons: How to Create a Budget
Keep these lessons in mind as you depart with your newfound numeracy.
Creating a Budget:
- Determine your revenue.
- Determine costs