A monthly budget briefly refers to a roadmap to how you will spend your cash each month and it can help you spend less and save more. The easiest way to create a monthly budget is by calculating your monthly income, tracking your spending and then allocating funds to various categories based on your financial scale of preference.
There are no strict rules when it comes to budgeting but if I must one then it should definitely be discipline. Creating a monthly budget is very easy but following it and implementing the plan consistently demands a lot of sacrifices and discipline.
How to Create a Monthly Budget
There are a lot of things you need to take into consideration before you can set up a monthly budget and in this article I will list and explain them clearly as per my own experience too.
1. Calculate your monthly income
As per my own experience with budgeting, the very first thing you need to know before establishing an accurate monthly budget is how much you get in hand after taxes, also known as your take-home pay.
If you are an individual that has a steady paycheck, you can simply multiply the amount in one paycheck by the number of paychecks you receive each month.
For those that have a variable income that is not really predictable each month, you can just look at your lowest-earning month on the last year and try to build your budget from that. However, since you are planning from the least earning month, you should always think of balancing the equation in the months where you earn really higher than expected.
2. Categorize your Spending
In order to get a sense of how much money you are spending every month, you should take a look at your actual expenses over the last three months and categorize your expenditures. It is of np doubt that not all expenditures will be the same every month, like for example - your house rent bill can be the same but your fuel bill might change so have that in mind.
Key expense categories in a budget include:
- Utilities
- Gasoline and other transportation costs (parking, tolls, public transportation)
- Phone and internet
- Household supplies
- Insurance premiums
- Rent or mortgage payment
- Food
- Streaming subscriptions
Once you have covered the last three months of expenses, make sure to add expenses that occur annually or twice a year that you may not have solved yet.
If you are not very sure where to see your expenses, then make sure to check your debit and credit card statements so that it gives you a run down of where you have spend your money. If you are someone that uses cash a lot, then you can try finding your receipts and check your exact expenses.
Better still, you must not do all the work yourself cause some banks' apps and budget apps such as EveryDollar, can help you easily keep track of your spendings.
3. Evaluate your Financial Scale of Preference
A good monthly budget is one that still allows you to cover your essential spending while also makimg sure you are spending money toward fulfilling hobbies or activities and also saving, too.
Once you review your savings, you may discover that you actually spend more or less than you expect in various categories. Like for example, you could be spending $250 a year on a subscription that you barely use since you are always busy with work. If you decide to shift that money towards savings, then that will means more to you than letting $250 somehow go to waste.
You can make savings a priority by listening to the words of investing guru Warren Buffet who said "Do not save what is left after spending, but spend what is left after saving."
Finding an account that earns competitive annual percentage yield (APY) and that either does not charge monthly service fee or makes this fee easy to avoid, can even make your savings more lucrative.
4. Design Your Budget
If you already have your actual spending aligned with your goals, you can use your spending history as a guide for your budget.
In order to get started the best way, you will need to choose a budgeting method and below are are some well known methods that work:
50/30/20 Rule: This budget rule is all about dividing your after tax income into three separate categories; 50 percent for needs, 30 percent for wants and 20 percent for savings. This is a very good option if you really earn more than you need to spend.
Envelope Budget: This is also referred to as cash stuffing, this approach works if you prefer paying for expenses with cash, though there are also digitalized versions of the method. This method is about creating an envelope for each expense category in your budget and using your pay to refill each envelope with the amount of money you have assigned for that category and once you have used all the money in a particular category, you stop spending on that category.
I do not much advised the Envelope budget method is yours involves keeping your funds in cash because it is lacking the protections that come with an FDIC-insured bank account. More to that, you lack the opportunity to earn interest as you could with one of the best high-yield checking accounts.
Once you select the approach that suits you best, list your spending categories and how much you pland on spending on each. You can easily do this by making use of a budgeting app or a spreadsheet.
Why Budgeting is Important
There are a lot of benefits that comes with budgeting and some of them includes;
- Bills that are paid on time, which not only avoids late fees but can help your credit score
- More money in your savings account
- The means to cover unplanned expenses
- Less overspending and debt accrual
Added to that, regular checks on your finances helps ensure you will catch any bank errors or fraudulent transactions.
Final Thoughts On How to Create a Monthly Budget That Actually Works
Setting up a budget is a cost effective way to keep up with your spendings, gain better understanding of your financial habits and incentivize saving, but before you create a monthly budget, review your spending for a few months, taking note of necessary expenses, unnecessary expenses and where there is room for savings.
