We often hear about budget almost everyday but do we really know what a budget is? well, a budget is a financial plan that helps you manage your finances in such a way that you know exactly how much you are earning, spending and saving.
Creating a budget helps you plan for expenses and it can also help you with insight into your spending habits, letting you to consider areas where you can cut back on your expenses. Also, a budget can help you establish a game plan on how to better allocate more money for your investments and savings.
In case you are looking to build your first monthly budget, then you need to stay glued to this article and discover our helpful tips on How to make a monthly Budget.
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What is a Monthly Budget?
A monthly budget plan as the name implies is actually a plan for how you will spend your income on monthly basis. Monthly budget are well known and necessary for every individual because several recurring expenses occur on a monthly basis, like rent, utilities, credit card payments, and some other loan payments.
It is obvious that the budget that you create will involve spending less than you make each month, therefore letting you save or invest the little amount left. As long as your expenses do no exceed your earnings, you will not need to tap into savings or borrow money in order to make ends meet.
Having a budget also makes you more mindful of your expenses, since you now prioritize your spending on things that are important to you over what is less important.
ALSO READ: 15 Effortless Ways to Save Money On Groceries
How to Create a Monthly Budget
Below are some tips that can help you establish a monthly budget without any hassle:
1. Calculate Your Monthly Income
The very first thing you need to do is to determine how much money you earn when taxes have been deducted and try to be honest enough with yourself. This will actually help you determine how much you are able to spend, save and invest on monthly basis.
When calculating your monthly earnings, look at consistent sources of income and try not to include less consistent sources of money like tipping or the cash you get from selling old items.
If you got old items and want to sell them, you might want to check out this guide on How to sell items on Craigslist.
Ensure that you calculate your earnings using your net income, also referred to as your take-home pay. This is the total amount of money you have left after taxes and other payroll deductions done.
2. Track Your Spending For Three Months
If you are not really sure of you spent your money, then you can track your actual spending over the course of a few months. There exist different budgeting apps that can help you track spending manually by saving receipts and adding up expenses by your own self.
As soon as you will begin tracking your expenditure, you might find out that you spend more or less than you expect in various categories.
Also budgeting expenses that may occur yearly instead of monthly should not escape your mind. You should account for expenditures such as property taxes, care insurance payments, doctor or veterinary visits and vacation costs.
3. Think About your Financial Priorities and Establish a Scale of Preference
Now that you have spent enough time tracking your spending, it is time for you to review your spending history and how it aligns with your financial priorities.
It is of no doubt that every individual got some expenses which they cannot sideline, these include housing costs, food and transportation. However, it is true that you cannot avoid them but you can monitor the way you spend on them so as not to over spend too.
Some people have that misconception that building a budget is all about limiting yourself to only spending money on essential stuffs, this is not much true. Establishing a budget is all about allocating your money in the way that makes sense to you.
As soon as you have a picture of how much you are spending on certain things, you might want to try adjusting your spending habits to in order to increase your savings.
ALSO READ: 5 Proven Ways On How to Save Money
4. Design Your Budget
Before you go about designing a budget, you need to first of all list the line items that correspond to each spending category. Paying yourself first will always be a smart move, so do not forget to include a line item for savings, regardless of the purpose.
One the best saving advice you can keep as your mantra is the words of investing baobab Warren Bufett who said, "Do not save what is left after spending, but spend what is left after saving".
If you do not know how to get started with budgeting categories, then below are some expense categories you might want to consider in your budgeting plan:
- Rent or mortgage payment
- Home maintenance
- Gym membership and other subscriptions
- Property taxes
- Car payment and car maintenance
- Gasoline and other transportation costs (parking, tolls, public transportation)
- Household supplies
- Pet supplies and pet medical expenses if you got one
- Food
- Utilities
- Phone and internet
- Childcare if you already have one
- Insurance premiums
- Debt repayment (credit cards, student loans, other loans)
- Medical bills
- Tuition fees
- Entertainment and hobbies
- Clothing and personal care
- Travel and gifts
Now that you got a picture of various categories, you need to take a look at your spending habits and see how they line up with your priorities.
Keep in mind that there are actually no strict rules when it comes to budgeting for as long as you are spending in a way that is satisfying to you and helps you achieve your financial goals then you are good to go. The golden rule here is simply to spend less than you earn each month and save up what you can save no matter how small you think it is.
5. Track Your Spending and Refine Your Budget as needed
A budget is a document that can be changed over time to our taste according to circumstances. Even if you have already built your budget, you should not stop tracking your spending, follow your spending plan and make any adjustment to your budget.
Why Budgeting Is Important
There are several advantages of regular budgeting and some of these include:
- Timely bills payments.
- Provides you with means to cover unplanned expenses.
- More money allocated to your online high-yield savings account.
- Better ability to avoid overspending
- Peace of mind since you know your finances are in order.
More to that, checking in regularly with your finances actually ensures that you will catch any bank errors or fraudulent transactions in case any arises.
Closing Remark On How to Make a Monthly Budget Plan
Establishing a monthly budget is for sure an amazing way to follow up with your spending, gain a better understanding of your financial habits and incentivize saving.
As earlier mentioned in this article, before you create a monthly budget, track your spending for a few months, noting necessary expenses and where there is room for savings.