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Today, I am going to show you the step by step guide on how to make a monthly budget.
I remember when I just started budgeting, I’d go from blog post to blog post reading how to correctly plan a monthly budget. It was time-consuming and frustrating.
It took us three months to finally polish our expenses and be able to stick to our budget. Although itt was not perfect, it still worked.
And in this no-nonsense post, I will show you exactly how to make a budget without taking too much of your time.
What Is A Simple Budget
A monthly budget is a detailed overview of your income and expenses. It shows you exactly how much money you are bringing in and how much you are spending.
The budget helps you track your savings as well as your spending habits.
A monthly budget has never been my priority. It was not until later that I realized that earning money is fantastic, but knowing where your money went is even better.
Why Do You Need To Budget
Before you start budgeting, nail down your purpose on why you need to budget. This will help you stay motivated when you get stuck once the road gets tough.
Here are some of the top reasons why people budget.
Pay Off Debt
If you have debt, budgeting will help you find extra money to add to your debt payment, which will cut your repayment time shorter.
Build Up Savings
When you have a budget, you will be able to save more money because you have control over where your money is going. Your savings will help you save for emergencies, afford your first home or prepare for retirement.
Stay Out Of Debt
A monthly budget makes you aware of how much you can afford. Therefore, it will keep you out of debt.
Check out this post to learn more about the benefits of budgeting.
What Should You Budget For
Your monthly budget should include your needs, your wants, and then your savings or debt repayment.
Learn more about budget categories and percentages that you can include in your monthly budget.
Not that you know and understand the basics of budgeting, it time for me to show you how to get started with it.
How To Make A Monthly Budget
#1 Get Organized
The very first step in creating a budget is to have all the paperwork you need, pay stubs, bank statements, and all types of bills that you pay every month or every year.
#2 Figure Out Income
Then, you figure out how much your household is making. The total will include earnings from your full-time job and other side hustles as well as your spouse’s.
However, make sure to separate fixed income and variable income. In that way, you will only be budgeting on the money that you are sure to receive that month.
If your income varies from month to month, it is recommended that you take the average and budget on that.
For example, if your income for the past 3 months were $3500, $2500 and $3000, your average monthly income will be $3000.
$3500 + $2500 + $3000 = $9000
$9000/3 months = $3000
You can also take the average for the whole year if your income has a significant difference.
#3 Itemize Expenses
Now, it’s time to see where your money is going. You will need to figure out your expenses in the last 30 days.
To do this, you will refer to your bank statements, credit card statements, and PayPal statements if you use one.
Next, you will then categorize each expense. It can be food, utilities, mortgage, car, loans, etc.
By the time you are done, you will see that pattern where the bulk of your money is going.
#4 Identify Fixed And Variable Expenses
Now, go back to the categories of your expenses and categorize them further into Two categories, fixed and variable.
Fixed expenses, expenses that you cannot change like savings, mortgage, car loan, student loan, utilities, etc.
Variable Expenses are the ones that can vary every month like groceries, dining out, personal care, etc. This is a category you can tweak as you work on your budget.
#4 Create A Budget
Now it’s time to budget.
Use this budgeting worksheet from the resource library to start making your monthly budget.
Start with your fixed expenses. List them all down, and then next to it, write the corresponding amount.
Now, take a look at your variable expenses and list them all down. Next to each expense, write down the monthly average amount that you spend in each of the categories.
You can also get the average based on how much you spent in the last three months.
Be realistic! It should be a comfortable amount. If you’ve been spending $500 on groceries in the past three months, do not go to the extreme of budgeting, only $100.
If you drastically reduce your expenses, you’ll most likely not stick to it. Work on reducing your expenses gradually.
#5 Use A Zero-Based Budget
Now that you know your total income and your total expenses, you can now apply the zero-based budgeting.
Zero-based budgeting is a method of budgeting in which your expenses match your income. So, if you have a $5,000 monthly take-home income, your expenses should also total $5,000.
You can do this by subtracting the total expenses from the total revenue, and the difference should be zero.
WHAT IF THE RESULT IS NOT ZERO?
If your result is a POSITIVE NUMBER, Congratulations! You are doing good in spending.
You will now create a plan for what to do with your leftover money. Your plan should align with your money goals.
If your goal is to pay off debt, use the extra money to pay down your debt. Likewise, if your goal is to build an emergency fund.
If the result is a NEGATIVE NUMBER, that means you are living beyond your means. But don’t panic! That’s why you are starting to make a monthly budget to make sure you are spending wisely.
Go back to your variable expenses and check every single item. Reevaluate if you really need to have that expense. If not, eliminate it.
But if you do need it, see if you can reduce it.
Now, after you made some adjustments, retake the difference between the total income and the new total of expenses.
The difference should be 0 or more. If you are still on the negative, go back to tweaking your variable expenses until you get to at least zero.
If you get to a point where you cannot reduce any of your expenses anymore, consider supplementing your income. Start a side hustle in your spare time.
#6 Use Extra Money Towards Money Goals
For those who have more than zero results, it is time to take care of the leftover money.
It is always best practice to tackle your debts when you have extra money. You can put some additional payments on credit cards, mortgage, student loans, etc.
One of our family’s priorities is an emergency fund. This money is to be used for future emergencies.
If you still do not have an emergency fund, this is the best place to put your leftover money. You can learn more about emergency money here.
If you already have one in place, then continue funding it until you reach three to six months’ worth of expenses. Consider putting in a bank, where you can earn interest.
You can also add the money to any of your sinking funds like a house, car, vacation, etc. and then just prioritize them accordingly. You can also just spread it out equally.
How To Stay On A Budget
Once you start a monthly budget, it can be exciting at first, but you’ll soon find out that sticking to it is the real challenge.
Here are some of the tips that can help you stick to your budget.
Start Your Budget Before The Month Begins
As you start budgeting, you’ll find out that every month needs a different budget. Some months will be more expensive, especially during the holidays and some months you can stay under your budget.
And by starting your budget before the month begins, you will be prepared on what is ahead. As a result, you will not go over your budget.
Review Your Monthly Budget Regularly
At the end of every month, find time to review your budget. You’ll notice that there are some categories that you can still trim, and there will be those that you might have to increase a little bit.
By doing this, you will increase your chances of not blowing your budget every single month.
Focus On Your Money Goals
Keeping your eyes on the prize usually does the trick. When you want to reach your money goals, you’ll find that you are willing to do everything to achieve those goals.
You can learn more tips on how to stick to your budget in this post.
How Do You Budget On A Low Income
Making a budget on a low income is no different than any budget. You’ll want to focus on the income that you have and reduce your expenses to match your income.
And when you found that you’re consistently blowing your budget, consider picking up a side hustle.
Budgeting is not set in stone, you’ll always be tweaking it to match your family’s finances, regardless of the amount of income.
There you have it! You can learn more about how to improve your finances by checking out this book.
Creating a budget is not hard at all, it is the ability to stick with that makes it a struggle. The first few months won’t be perfect, but you will get the hang of it.
Until now, we still have months that we go over our budget, and we’re also continually tweaking our monthly budget.