How to create a budget
Many people who have achieved financial success attribute their fortune to a monthly budget. Not only do budgets help families and individuals set spending limits, but they are also great tools to help reach financial goals such as getting out of debt. However, many people do not understand how to create a monthly budget. In their eyes, having a budget just means that they remind themselves not to spend too much money each week. In order to properly track finances, consumers should take the following steps to create a helpful monthly budget.
1. Calculate total income
The first step when creating a budget is to find out what there is to work with. How much money is being brought into the equation each month? Add all paychecks together to get a grand total. Make sure to use only the money that is actually paid out on the check and not the gross income earned. The government will take a portion of the gross income every pay period for taxes, so it is best to simply look at the take home amount.
2. Develop categories for every main expense.
Think of the main bills that are paid each month, and create a category for each of these items. The most common bills include rent or mortgage, water and electricity bills, groceries, gas money, insurance payments, and car payments. If a family or individual uses a credit card, this should also be included as one of the main categories. It is wise to pay off debt as quickly as possible and credit card payments should not be overlooked in a family budget.
3. Create smaller categories for hidden expenses.
For many people, it is the small details that will make or break a budget. Families may stay within their limits on larger bills, but it is very easy to overlook smaller purchases on various items. Throughout the month, these small purchases add up and can cause a family to spend more money than they have. For example, most people do not have a category for gifts in their monthly budget. Nobody really thinks that they spend a lot of money on gifts unless it is around the holidays. However, many months require families to purchase at least one gift for events like birthdays, graduations, weddings, and baby showers.
Another category that budget-savvy families typically include is school expenses. Even if the kids attend public schools, there are many expenses that parents must pay out of pocket. These include costs like school lunches, field trips, yearly school portraits, teacher’s appreciation gifts, and extra supplies for class projects. The more children that a family has, the higher allowance this category should receive.
4. Set up an emergency fund.
Life happens. Vehicles break down, people get sick, and friends need a hand. There always seems to be random expenses that do not fit into any of the categories that have been made, but they are still essential nonetheless. It is important that budgets accommodate these emergencies in life, so experts advise people to set aside at least five percent of their total take home pay for an emergency fund. If the money in this area is not spent by the end of the month, it should not be rolled into another category. The money should be left alone so that the balance can grow over time and the funds can accommodate these events as they occur.
5. Analyze past spending habits to create a spending limit for each category.
Once categories have been assigned within a budget, the final step is to set a limit on how much money can be spent within that category each month. Some of the larger items, such as mortgage payments and insurance rates, remain constant. Simply plug in the monthly payment for each of these categories and they are done. Other areas, such as petrol money or entertainment, should be estimated carefully. The goal is to spend the least amount of money within each category while still meeting the individual’s needs. A good way to come up with figures for these areas is to look over bank statements or receipts from previous months to find a ball park figure of how much money is usually spent in that area. Always round up to account for unexpected purchases, and use this figure as a monthly spending limit.
Monthly budgets are great financial tools to help people live within their means and save for the future. While some consumers were taught how to create a budget during their school years, others have been left to figure out the process through trial and error. Beginners can use these tips to develop a functioning monthly budget that will help them meet their financial goals and freedom.
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