Creating a monthly budget is the quickest way to take control of your finances and understand where your money is going. You can then review your monthly spending habits to get a snapshot of your incoming and outgoing transactions, and determine areas for improvement.
Step 1: Calculate Your Income
The very first step to creating a budget is determining your income. It is important to know what your net income is each month, so that you know what you have available to spend.
Step 2: Track Your Spending
Once you have determined your income, you will want to take a look at your spending. Reviewing and categorizing all your monthly bills can help you break things down. To start, list out your fixed expenses – these are things like car payments, loans, rent or mortgage costs that do not change on a monthly basis. Next, take a look at your variable expenses – things like groceries, gas, entertainment, etc., and determine your average spend. This is typically the area where people are able to cut back.
Step 3: Set Realistic Goals
Realistic goals are vital for long-lasting financial health. It is important to determine what you cannot live without and where you can cut costs or scale back on spending. Ideally, when it comes to your monthly budget, you want to consider the 50/30/20 rule, which applies the following:
- 50% of your spending is for NEEDS such as rent or mortgage payments, car payments, utilities and groceries
- 30% of your income goes to WANTS such as shopping, vacations, streaming services, etc.
- 20% of your income goes to SAVINGS OR DEBT such as emergency funds, retirement, child’s education and/or credit card payments
Step 4: Make a Plan
Once you have your goals set, you can now make a plan to tackle your financial position and ensure a healthy cashflow each month. For some, setting realistic spending limits for each category works well. For others, taking a look at their expense list and re-prioritizing can free up funds.
Step 5: Adjust Your Spending
Now you can take a look at adjusting your spending to ensure you remain on budget. This is also a great time to review your fixed expenses. Perhaps you can save money by getting a better interest rate on your mortgage or changing your payment schedule for your loan.
Step 6: Stay on Track With Your Budget
Lastly, once you’ve tracked all your spending and income, and determined a monthly budget, you will want to stay on track. Tracking your budget on a monthly basis is important to catch any changes in your spending habits. It is also a good idea to conduct an annual review and take into account any increase in expenses or wages that may require shifts in your overall plan.
Remember! A healthy, well-thought-out budget is key to financial freedom and comfort.