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Whichever method you choose, personal budgeting involves three basic routines:
- Track what you earn and what you spend.
- Work on keeping the second number smaller than the first.
- Lather, rinse, repeat every month.
Unfortunately, just because budgeting is easy doesn't mean it is easy. And if you've never created a budget before, you might be overwhelmed with the exact question of what to do and how to do it.
Fortunately, despite reports to the contrary, creating a budget from scratch doesn't have to be painful or difficult. See how you can create a no-fuss and simple offer that works for you.
Step 1. Adopt the ongoing budget process
We often tend to think of budgeting as a one-time task. You sit down with your bills and receipts. You will find out how much you have spent. You plan how much you will spend in the future.
Let's consider an example with a compound pair, "Henry" and "Janine". When Janine and Henry first tried to create a budget, they realized they had lost more than $450 the previous month going out to dinner. So they vowed not to spend more than $50 a week at restaurants and hit the road happy, feeling good about their budget.
When you call that a budget, it's very hard to get, as Janine and Henry have learned. After the couple created their first budget, they didn't actively track their spending, so they didn't notice when they went over their self-imposed spending limit at restaurants. They didn't understand why they kept fighting to survive. It eventually got to the point where they had to sit down to budget again and start the whole process over.
The best way to set yourself up for budgeting success is to accept the fact that budgeting is the ongoing strategy you will use to live the financial life you desire. Instead of looking at budgeting as a one-off or occasional task, it's better to think of it as a regular maintenance task, like doing laundry.
Like money management, money laundering is an ongoing responsibility that cannot be avoided, ignored or forgotten without serious consequences. Approaching your new budget with the realization that you're committing to a regular and ongoing process will help you stick to your budget, which is far more important than just creating one.
To prepare for this new role, Janine and Henry schedule weekly time to review the budget together.
Step 2. Calculate your monthly income
Once you accept the realities of the budgeting process, you can start learning the nitty-gritty numbers. You start by calculating your monthly income.
For someone drawing a salary from a traditional employer, this part will be very easy. All you have to do is take a look at your most recent paycheck to see how much you're making per paycheck. You can multiply that by four if you're paid weekly, or by two if you're paid biweekly or twice a month.
Janine receives a paycheck for $1,550 on the 1st and 15th of every month. Multiplied by two, his monthly salary is $3,100. Knowing this amount gives you a starting point for calculating your budget.
However, if you're self-employed, have setbacks, earn hourly or overtime, or rely on tips or commissions, calculating your monthly income is a little more difficult. In this case, collect your income information for the last three to six months and calculate the average. This can give you an idea of how much you make on average each month.
Henry works as a freelancer, so his income fluctuates. However, if you look back at your earnings over the last six months, you realize that even though you made just $1,300 one month and almost $8,000 another month, your average monthly income (after reserving your estimated payments from quarterly tax returns). ) are $3,500.
Between Janine and Henry, their median monthly income is $6,600 (Janine's income of $3,100 + Henry's median monthly income of $3,500).
Step 3. Add the required outputs
Your essential expenses are the minimum you need each month to fund your life. These include fixed expenses and variable needs.
Most people have a basic understanding of their fixed or recurring expenses. For example, you know exactly how much rent or mortgage you pay each month.
Now is the time to research and record all of your fixed expenses. This can include:
- Utilities, including cell phone and WiFi/data access (if fluctuating, calculate monthly average over last 12 months)
- car payment
- car insurance
- student loan payment
- alimony or alimony
- childcare costs
- Monthly subscriptions (like gym)
The fixed costs of Janine and Henry look like this:
These fixed costs are the easiest to track as they often stay the same from month to month. However, you will find that some necessary costs are not included in these expenses, such as: B. Groceries or prescription drugs. These are variable but necessary expenses that may change from month to month.
For variable expenses, it's a good idea to calculate the monthly average over the last 12 months. (If there are expenses that don't appear monthly, add up the total annual amount you've spent and divide that amount by 12 to find your monthly average.) Consider the following irregular but necessary expenses:
- Medical Consultations
- Household contents insurance / household insurance
- Car maintenance and repair
- house maintenance and repairs
- credit card payments
Let's take a look at Janine and Henry's changing but necessary monthly expenses:
|Variable but necessary monthly expenses||Crowd|
Car maintenance and repair
Petrol, Parken, Toll
credit card payments
Once you figure out how much you spend each month on those necessities, you have your basic spending budget.
Henry and Janine's base monthly budget is $3,430 ($2,190 fixed monthly expenses + $1,240 variable monthly expenses).
Step 4. Add Pay Yourself line items
Paying yourself means funding financial goals and plans before spending your discretionary money. A lot of people forget to include these types of goals in their budget, assuming they'll reach them with what's left at the end of the month. But planning to use the leftover cash often means your goals get out of hand. So the next step in creating a sustainable budget is to create line items in your budget for your main goals.
Start by writing down your financial goals. Some examples are:
- building aemergency fund
- pay off the debt
- Maximize yourpension contributions
- Saving for a bigger purchase
After you've chosen your goals, calculate how much you're paying for each one each month. If you have a deadline in mind, divide the amount of money you need towards your goal by the number of months until the deadline to find your monthly savings amount.
Add these self-pay amounts to your fixed costs. By viewing your financial goals as fixed expenses and line items in your monthly budget, you can get used to prioritizing your goals.
Henry and Janine have several financial goals they want to achieve, including paying for theirsstudent loansfaster, save for retirement, save for a trip to Machu Picchu and one day buy a house of your own. You decide to pay the following amounts for each goal:
$140 (in addition to the required payment of $310, for a total monthly payment of $450)
$85 (in addition to the required payment of $415, for a total monthly payment of $500)
401 (k) Janine
Journey to Machu Picchu
Janine and Henry's expense budget is now $4,755 ($3,430 base expenses + $1,325 initial payment items).
Step 5. Plan your voluntary spending
Now that you've calculated your base spend and line items for your financial goals, you can add discretionary spend. These are the expenses you want and don't need. They can include things like entertainment, dining out, clothing, and the like.
While some discretionary spending may be necessary (like clothing, unless your workplace is very open), how much you spend on these items is up to you.
Calculating these expenses is a bit more complicated than the previous steps. That's because you need to know more than just what you've spent in the past. Start with these numbers and use them to decide whether these values are too high, too low, or just right.
For example, you could spend $150 going out to lunch every month. This step gives you an opportunity to understand how much you're spending on convenience and adjust your spending plan accordingly. On the other hand, if you find that you put three months between haircuts to save money but really prefer the way it looks when you go every six weeks, you can increase your haircut budget.
Now add your ideal discretionary spending amounts to your expenses to create your monthly spending plan.
Let's take a look at Henry and Janine's monthly spending schedule:
|Monthly discretionary spending plan||Crowd|
Entertainment (including streaming services)
go out for dinner
Personal attention (including haircuts/gym membership)
With additional discretionary spending, Janine and Henry now have a spending plan of $5,495 per month ($3,430 in basic spending + $1,325 in pay-first items + $740 in discretionary spending).
Step 6. Compare and Match
Compare your expenses with your income. If your expense number is less than or equal to your income number, your budget is balanced. If so, you're ready to implement your budget.
However, if your expenses exceed your income, you need to adjust your expenses. You can do this by playing with any non-fixed expenses. A key caveat to your adjustments is that you should focus on discretionary spending or variable expenses (like your grocery budget) before you start trimming your savings toward your financial goals. Protecting your down payment items in the budget will help ensure you meet the financial milestones that are important to you.
For Janine and Henry, their monthly spending plan of $5,495 is well below their average monthly income of $6,600. However, since Henry's income is variable, they need to create a plan for the underperforming months. For example, the month Henry brought home only $1,300, his total income was $4,400. They need to determine which items to cut during those months or how to capture their excess income in the high-income months to offset the low-income months.
Step 7. Implement and control your spending
With a balanced budget, you're ready to put your spending plan into action. Start spending and saving based on the budget you create.
However, there is more to implementing your new budget than just keeping an eye on your spending limits. You also need to track your spending to identify vulnerabilities. The best way is to use the tool that works best for you, regardless of whether you use ita budget app, a table or paper and pen.
For example, Janine spends $10 every day on lunch at the cafeteria at her workplace. She and Henry have a weekly budget of $50 to go out to dinner, but Janine's cafeteria expenses mean she spends that budget on work rather than nights out or weekends. Instead of blaming herself, Janine works to figure out what drives her to go grocery shopping there after deciding against it.
Janine may find that she never thinks about packing lunch, so she and Henry start making lunch every Sunday for a week. Or you might find you bring lunch with you, but it's never as tempting as hot food. In this case, you decide to stop bringing money to work to make sure you eat what you brought with you.
If you implement and track your budget, you will notice patterns over time. This will help you make the necessary changes to your budget and figure out what's important to you.
Budget can set you free
Budgeting often gets a bad rap, but it's all about spending money on the things that matter most to you. The simple process of budgeting is a great learning opportunity for you and your family. If, like Janine and Henry, youBudget for couples, take the time to address your individual and collective goals, including the finances that support them.
Henry and Janine's budget, as described above, is very close to completiona budget of 50/20/30, where approximately 50% of your income goes to basic necessities, 20% to savings and debt relief, and 30% to basic necessities. Another useful budget template isa zero-based budget, where every dollar earned is assigned to a specific job.
If you are self-employed ora fluctuating income, your budget must include a larger savings reserve for the occasional months when your income is lower than expected, and a plan to optimize the months when your income is higher.
No matter which method you use—calculating your income and expenses, determining how to reach your financial goals, and planning your discretionary spending—you have the framework you need to integrate your finances into your life.