How to Create a Budget
Record the net monthly income that you receive., Remove from your net monthly income your stated savings goal., List down your monthly expenses into three separate categories., Subtract the total amount of expenses from the total income for the...
Step-by-Step Guide
-
Step 1: Record the net monthly income that you receive.
Net income is the amount that you actually get to take home, after all the deductions (taxes, health care) have been subtracted.
Include other sources of income as well if applicable, such as tips, monthly bonuses, cost of living increases, dividends, interest income, etc.
What do you do if your income is constantly changing? You pretty much have to do things topsy-turvy.Determine all your essential, priority and lifestyle expenses first.
Then, with your paycheck, start paying off all your essential needs first, followed by your priority and then lifestyle expenses.
The money you have left over can either be set aside for an emergency account or stashed away into savings. , Ideally, set up an automatic withdrawal into another account so that you aren't even tempted to touch it.
If you never see it, you won't miss it.
Squirreling away savings will help you anticipate emergency scenarios and prepare you for retirement.
How much money should you try to save? It mostly depends on your salary, but a good benchmark is 15% to 20%.If you can only afford to save 10% of your annual income, that's fine, provided that you save some of it.
Take advantage of matching contributions from your employer, if possible.
If your employer matches contributions to your 401(k) — up to a certain percent — take full advantage of their generosity.
It's the closest thing you'll get to "free money" in your lifetime. , These categories are "fixed," "flexible," and "discretionary." Fixed expenses remain the same each month, such as a mortgages or rent, a loan payment, insurance or medical premiums, etc.
Total up all fixed expenses.
Flexible expenses include items that are necessary, but in which you can control the amount of money spent on, such as household and grocery items, clothing, utilities, etc.
Total up all flexible expenses.
Discretionary expenses are items that are not necessary for survival.
These could include expenses for recreation such as movies, travels, and impulse buys.
If your expense to income ratio is out of balance and you are spending more money than you earn, items from this category should be eliminated or cut back.
Total up all discretionary expenses. , If the expense total is less than the income total, then you are managing your finances well and should keep up with doing so.
But if the expense total is greater than the income total, you are off-track financially and need to prioritize expenses. , Check your bank and credit statement to see what you spend money on, or sign up for a personal finance application online.
This will help you track what you spend money on that's not absolutely essential.
Keep track of when you use credit cards.
Did you know that people who use credit cards are more likely to spend more money than people who use cold, hard cash?That's because cash "feels" more real, so it hurts more than credit.
Try carrying only cash around and see if you spend less.
Look to see how much you spend on eating out, on your morning coffee from Starbucks, on watching movies in the cinema, and other costs you can cut back on.
Many people need their Starbucks fix, even if there's a coffee machine at work.
One cup of coffee per day, at $2.50 per cup, equals more than $900 per year! Think about what you could do with $900.
Begin to have the tough discussions about what you can cut back on or cut out altogether.
Whether this conversation is made with a spouse or with yourself, try to be honest, forthright, and understanding.
Nobody likes cutting back spending, even if it needs to be done. , This is the only amount that is yours to spend if you aim to be debt-free.
If you get paid weekly, make sure enough money is set aside to meet the monthly bills.
Never borrow from the amount that should be used for monthly expenses.
This reserve method will save you from living paycheck to paycheck. , Compare actual expenses against what you budgeted.
If there are glaring variances, you might need to make adjustments on your discretionary expenses.
As time passes, you may want to only perform this comparison on a quarterly basis. -
Step 2: Remove from your net monthly income your stated savings goal.
-
Step 3: List down your monthly expenses into three separate categories.
-
Step 4: Subtract the total amount of expenses from the total income for the month.
-
Step 5: If your budget is feeling pinched
-
Step 6: take a look at flexible and discretionary expenses.
-
Step 7: Look at how much money you now have left from your income
-
Step 8: after the expenses have been covered for.
-
Step 9: Review the budget plan during the end of each income period
-
Step 10: in order to ensure that you stay on track.
Detailed Guide
Net income is the amount that you actually get to take home, after all the deductions (taxes, health care) have been subtracted.
Include other sources of income as well if applicable, such as tips, monthly bonuses, cost of living increases, dividends, interest income, etc.
What do you do if your income is constantly changing? You pretty much have to do things topsy-turvy.Determine all your essential, priority and lifestyle expenses first.
Then, with your paycheck, start paying off all your essential needs first, followed by your priority and then lifestyle expenses.
The money you have left over can either be set aside for an emergency account or stashed away into savings. , Ideally, set up an automatic withdrawal into another account so that you aren't even tempted to touch it.
If you never see it, you won't miss it.
Squirreling away savings will help you anticipate emergency scenarios and prepare you for retirement.
How much money should you try to save? It mostly depends on your salary, but a good benchmark is 15% to 20%.If you can only afford to save 10% of your annual income, that's fine, provided that you save some of it.
Take advantage of matching contributions from your employer, if possible.
If your employer matches contributions to your 401(k) — up to a certain percent — take full advantage of their generosity.
It's the closest thing you'll get to "free money" in your lifetime. , These categories are "fixed," "flexible," and "discretionary." Fixed expenses remain the same each month, such as a mortgages or rent, a loan payment, insurance or medical premiums, etc.
Total up all fixed expenses.
Flexible expenses include items that are necessary, but in which you can control the amount of money spent on, such as household and grocery items, clothing, utilities, etc.
Total up all flexible expenses.
Discretionary expenses are items that are not necessary for survival.
These could include expenses for recreation such as movies, travels, and impulse buys.
If your expense to income ratio is out of balance and you are spending more money than you earn, items from this category should be eliminated or cut back.
Total up all discretionary expenses. , If the expense total is less than the income total, then you are managing your finances well and should keep up with doing so.
But if the expense total is greater than the income total, you are off-track financially and need to prioritize expenses. , Check your bank and credit statement to see what you spend money on, or sign up for a personal finance application online.
This will help you track what you spend money on that's not absolutely essential.
Keep track of when you use credit cards.
Did you know that people who use credit cards are more likely to spend more money than people who use cold, hard cash?That's because cash "feels" more real, so it hurts more than credit.
Try carrying only cash around and see if you spend less.
Look to see how much you spend on eating out, on your morning coffee from Starbucks, on watching movies in the cinema, and other costs you can cut back on.
Many people need their Starbucks fix, even if there's a coffee machine at work.
One cup of coffee per day, at $2.50 per cup, equals more than $900 per year! Think about what you could do with $900.
Begin to have the tough discussions about what you can cut back on or cut out altogether.
Whether this conversation is made with a spouse or with yourself, try to be honest, forthright, and understanding.
Nobody likes cutting back spending, even if it needs to be done. , This is the only amount that is yours to spend if you aim to be debt-free.
If you get paid weekly, make sure enough money is set aside to meet the monthly bills.
Never borrow from the amount that should be used for monthly expenses.
This reserve method will save you from living paycheck to paycheck. , Compare actual expenses against what you budgeted.
If there are glaring variances, you might need to make adjustments on your discretionary expenses.
As time passes, you may want to only perform this comparison on a quarterly basis.
About the Author
Catherine Alvarez
Dedicated to helping readers learn new skills in crafts and beyond.
Rate This Guide
How helpful was this guide? Click to rate: