When you see your credit card or bank statement at the end of the month, are you surprised by how much you spent? Do you ever feel like you can’t stay on top of your spending, no matter what you do?
Creating a budget enables you to understand where your money is being spent. Budgeting can assist with your spending and limit the amount of spending on unnecessary things. Following a budget will enable you to pay your bills consistently, help reduce debt, and have greater peace of mind about your finances.
Why do I need to budget?
You should budget to make sure you have the funds you need to meet your financial responsibilities. Budgeting helps you understand how much you make and spend, empowering you to make smarter financial decisions.
How to budget
What do I need to create a budget?
Taking control of your finances starts with knowledge of your current financial status. You need to know what your monthly income is and how much you have to pay in expenses. Knowing this information allows you to realistically stick to your budget. Finally, it helps to create a written budget plan, such as writing out your budget on a piece of paper, inputting expenses and other items in a spreadsheet, or utilizing budgeting software.
How to create a budget
1. Calculate monthly expenses and income
The first step in creating a budget is determining how much money you receive each month. Be sure to use the net amount on your paychecks, not your salary or hourly wage, in order to account for taxes. You should also include any money you make from other side jobs and hobbies.
Next, calculate how much you pay in expenses. Start with necessities, such as payments for rent, utilities, insurance, car payments, loan repayments, and other bills. Then, use your previous bank statements to understand how much you spend on food, entertainment, fuel, etc.
Now, subtract the total amount of your expenses from your monthly income amount. If your income is higher than your expenses (you make more than you spend), you can put that leftover money in savings or towards other expenses that may arise that were not previously accounted for when making your budget. However, if you are spending more than you make, you will need to use your budget to help reduce and/or better allocate for your expenses.
2. Set spending goals
Why are you creating a budget plan? Do you want to spend less in general or be able to put more money toward an expense such as a large bill? Do you need to find ways to lower your monthly expenses? Once you know, you can decide how best to prioritize your spending.
3. Create your budget plan
Create a category for your different spending needs, such as Food, Car Insurance, Loans, Health, etc., on your budget spreadsheet or plan. Using the amounts you calculated in step one, set the amount you want to spend on each category each month.
For example, if your car insurance payments are usually $100, you should set the Car Insurance category amount for $100.
If you have expense amounts that change each month, such as utilities, use the highest amount you pay on average to ensure you set aside enough for that cost.
You should also include a miscellaneous or buffer category that can help you pay for unexpected expenses such as repairs or emergencies.
4. Prioritize your spending
If you want to save money or lower your expenses, look at the non-essential parts of your budget. This may include:
- Eating out
You can lower the amount you spend on these items, resulting in more cash to pay for necessary expenses. You can also spend less on categories such as groceries, if available. However, it’s important to set an amount you will stick to consistently.
Why is budgeting important?
Budgeting is important because it helps you control your spending. You can use these budgeting tips to help reach your financial goals, such as paying off a loan sooner or saving enough money to buy a home or car. When you know you have money for emergency expenses, you will also have more confidence in your financial future knowing that you prepared for these expenses.