A budget is a plan for your future income and expenditures that you can use as a guideline for spending and saving. Although many people already use a budget to plan their spending, many of us also routinely spend more than we can afford. The key to spending within your means is to know your expenses and to spend less than you make. A good monthly budget can help ensure you pay your bills on time, have funds to cover unexpected emergencies, and reach your financial goals.
Most of the information you need is already at your fingertips. To create or rework your budget, follow the simple steps outlined below to get a clear picture of your monthly finances.
To set a monthly budget, you first need to determine how much income you have. Make sure you include all sources of income such as salaries, interest and any other income, including a spouse’s income if you’re married.
If you receive a salary, use your after-tax pay rather than your before-tax pay amount. Taxes are usually taken out automatically, but if they’re not, remember to include them as another expense.
The best way to do this is to keep track of how much you spend for one month. Fixed expenses are those that generally do not change from month to month, such as rent and insurance payments. Flexible expenses are those that do change from month to month, such as food or entertainment. If some of your expenses for one or more categories change significantly each month, take a three-month average for your total.
Once you’ve added up your monthly income and your monthly expenses, subtract the expense total from the income total to get the difference. A positive number indicates you’re spending less than you earn. A negative number indicates your expenses are greater than your income. This means you will need to trim your expenses to live within your means.
The next step is to track your budget over time to make sure you’re sticking to it. If you find you aren’t able to follow your budget successfully, it may mean your plan isn’t flexible enough. It can take revisiting your budget a few times to find the balance that works for you.
Sometimes you may find you are spending more than you’re saving and steadily going deeper into debt as a result. This is an easy and common pattern to fall into, and one that requires some planning and discipline to reverse.
The first step is creating a budget. Creating a budget is nothing more than examining your income and expenditures to determine exactly how much money you have coming in and where you’re spending that money.
Once you’ve got a clear understanding of your current budget, your challenge is to find places where you can spend less to achieve your financial goals. Here are some steps you can take toward that end:
What do you want? What do you really need? Evaluate your current financial situation. Take a look at the big picture. Make two lists – one for needs and one for wants. As you make the list, ask yourself:
We all have different budgets based on our needs and wants. But the idea is to understand how much you spend on different items and set your budget according to how much you have to spend and what’s important to you.
Once you start tracking, you may be surprised to find you spend hundreds of dollars a month on eating out or other flexible expenses. Some of these are easily trimmed. Cutting back is usually a better place to start than completely cutting out. Be realistic. It will help you to be better prepared for unexpected costs.
In finding ways to trim flexible expenses, it helps to have a goal to save toward each month. Setting such a goal needs to be SMART:
SPECIFIC Smart goals are specific enough to suggest action. Example: Save enough to visit USA for your wedding anniversary. Not just “save money.”
MEASURABLE You need to know when you achieved your goal or how close you are. Example: A trip to USA costs $4,000, and you have $800 saved.
ATTAINABLE The steps toward reaching your goal need to be reasonable and possible. Example: I know I can save enough money each week to purchase that trip to USA.
RELEVANT The goal needs to make sense. You don’t want to work toward a goal that doesn’t fit your need. Example: We would like to stay in four-star hotels in celebration of our anniversary.
TIME-RELATED Set a definite target date. Example: I want to go to USA by next summer.