Every dollar you earn and every minute you spend is an investment. Your budget tells you where your money goes each month and can help you gain more control over your finances. Follow these steps to make personal budgeting quick and easy.
Step 1: Determine Your Net Income
Your net income is the foundation of a well-planned budget. In other words, it is your take-home salary after deductions for taxes and employer-provided benefits like retirement plans and health insurance.
Remember, relying on your total salary instead of your net income may make you splurge. You’ll mistakenly believe you have more money than you have. Maintaining detailed records of your agreements and payments can help you manage unpredictable earnings if you are a freelancer or a self-employed person.
Step 2: Find Your Savings Rate
You get your savings rate from the difference between your earnings and expenses. It defines your financial stability and wealth. The savings rate shows you how much of your earnings you can allocate each month toward accumulating wealth.
Keep a savings rate target of 10% or more of your net income post-tax. Depending on your financial goals or if you wish to retire early, you should increase your savings rate and build a passive income from it which can help you in times of high inflation and runaway food costs.
Also, you can use your monthly savings to pay off unsecured debts, such as credit card debts or personal loans. Next, enroll for a secured credit card. How you achieve your savings goal is the rest of the budgeting process.
Step 3: Make a Spreadsheet for Your Budget
Creating a basic monthly budget doesn’t need you to be an Excel expert. It’s not even necessary for you to build your template; you can use the worksheets on Google drive.
The spreadsheet should have four categories: savings, income, expenses, and a financial summary. But first, write in your savings goal that you’ve already determined. Next, you can start mapping out a course to get to that savings rate.
Pro Tip: You can sign up with Tiller or check out Microsoft 365 for customized templates and easy budgeting on Google Sheets or Excel.
Step 4: Identify Month-to-Month Expenses
The two main expenses you incur each month are essential (unavoidable) and optional (avoidable) expenses. You can cut back even on the essential expenses to some extent. Based on this, the distinction between necessary and optional spending is a helpful reminder of where you have the most flexibility to save in your monthly budget.
Although there are inventive ways to cut or evade these necessary costs, most financial experts call them unavoidable monthly living expenses.
- Accommodation: Think about how much you can afford while still being satisfied rather than how much you can spend.
- Transportation: If you want to amass a fortune, buy the least expensive car.
- Groceries: To survive, you must eat. Moreover, you do not need a gourmet feast every day – not even every week. Once a month is more like it when gas prices are what they are.
- Utilities: You will require internet, water, power, and possibly gas. Still, you can reduce utility costs through sustainable living.
- Medical care: You can use benefits, choose a preferred provider option (PPO) based on your insurance plan, pay in cash, or even request discounts.
- Child care: For under-school-age kids, you can hire babysitters instead of nannies, swap responsibilities with family or friends, or have play dates.
- Debts: Pay off unsecured debts like credit card bills and student loans as soon as possible.
Remember that you have total control over these costs. Anything you spend on the below items should be the bare minimum and only if you can’t live without them. The list includes:
- Food: restaurants and takeout
- Shopping for clothes or accessories
- Cosmetics and personal care
- Alcohol and tobacco
Step 5: Review Your Budget Regularly
It’s essential to regularly review your spending to make sure you are staying on track. No budget is set in stone; it can change. For instance, your spending might alter, you might get a bonus, or you might achieve a target and decide to create new goals. Whatever the reason, establish the practice of periodically reviewing your budget using the methods above. Here is a practice you can follow:
- Keep a track of monthly expenses
- Understand your spending pattern
- Adjust expenditures to must-haves and eliminate luxuries
It’s simple to create a budget, but changing your spending habits is the tricky part. There are several ways you might hold yourself accountable for deviations from your budget. To begin with, you can activate notifications for your bank and credit card accounts to remind you when you hit a set spending limit. Learn to live frugally, which means not buying things you cannot afford. It constitutes the foundation of successful personal budgeting.