Are you itching to be financially responsible and make a monthly budget to control your spending? Then this article is for you! Continue reading to find out more.
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What is a Monthly Budget, and Why is It Important?
A monthly budget is a plan on how you will spend your money every month. It will help you allocate money to cover your expenditures such as housing, food, transportation, insurance, credit card payments, and others.
A monthly budget is essential for the following reasons:
- To assist you in managing or avoiding debt. Spending less than your earnings will help you pay for your credit balances and other loan obligations.
- To help you achieve your goals. By budgeting, you can save more money for a down payment of a car or a house, travel to your dream destination, etc.
- To build an emergency fund. An emergency fund will help you during financial emergencies.
Steps on Making Monthly Budget
Here are ways to create a budget tailored to your income and expenses:
Calculate Your Monthly Income
The first step to budgeting is to determine your monthly income. It’s vital to make sure that the budget you make doesn’t involve spending more money than your earnings. When calculating your income, use your “take-home pay” – the money left after payroll deductions. You should also include pensions, child support, dividend earnings, and others that’ll affect your budget.
Gather Financial Statements
Gathering financial statements for the last three months will help you have a bird’s-eye view of how much money is coming in and will be needed for your expenses. Include your monthly income and expenses, investment accounts, credit cards, benefit statements, and others where you typically spend money.
Categorize Your Expenses: Fixed or Variable
Fixed expenses are payments that are relatively consistent monthly; they are your needs rather than wants. Examples of fixed expenses include rent or mortgage, health insurance, utility bills, car payments, TV, internet, and mobile services.
Meanwhile, variable expenses are classified as wants such as travel, gifts, dining, and entertainment. If you see that too much money is being spent on your wants, you need to trim your expenses to save more so you can build an emergency fund or save for retirement.
Follow the 50/30/20 Rule
This model is a popular approach to budgeting. You divide your income into three according to the following percentage: 50% for your “needs,” such as food, rent, utility bills, etc.; 30% for “wants” such as travels or entertainment, and 20% for savings and debt repayment.
Track Your Spending and Make Changes as Needed
Life’s circumstances and your priorities may change over time. You can revise it for changes in your income and financial priorities.
Here are additional tips you can follow:
- Earning a raise doesn’t mean you’ll find ways to spend it.
- Eating is a necessity while eating at a five-star restaurant is a luxury.
- Watch out for small expenses. Such everyday habits as buying a $3 coffee can accumulate affecting your budget.
Budgeting is about spending money on the things that matter most. Remember that a well-planned and executed budget can make a significant difference.
Also Read: Alternatives to An Online PayDay Loan