Having a budget is essential in order to better manage your money and reach your financial goals, such as paying off debt or saving to buy a home. A budget can help you set spending limits and feel more in control of your money. So, we’ll be going over how to create your own personal budget.
The first step of budgeting is finding out your net monthly income. To calculate how much money you will be taking home, you will need to deduct taxes, insurance costs, and business expenses from your monthly salary. This will leave you with an exact amount that you will be receiving at the end of each month, known as your net monthly income.
No matter how much you earn, it is still possible to end up with no money if you don’t know how to spend it properly. So, the next step is the figure out how to allocate that amount by tracking your expenses and seeing exactly where your money is going. Start by dividing your expenses into two categories, fixed and variable expenses. Fixed expenses are recurring monthly payments such as rent and phone bills which typically remain the same each month. Variable expenses tend to vary based on consumption, such as groceries, gas, entertainment, and eating out.
To determine areas where you can save more money, review some of your credit card and bank statements from the past few months. If your net income is greater than your total expenses, then you can start putting aside the extra money for your retirement or emergency fund. However, if your expenses exceed your net income, then you must look for ways to cut down on expenses as soon as possible. This involves going over your variable expenses and identifying unnecessary expenses such as subscriptions that you no longer need or eating out too often. Variable expenses are typically easier to cut down on in order to stick to a strict budget., but you may even need to look to adjust your fixed expenses in case you are still going over your budget.
While budgeting differs depending on each person’s situation, the 50/30/20 budget is a popular choice that works in most circumstances. Under this strategy, your net income will be split 50% for needs, 30% for wants, and 20% for savings or paying off debt. Also, your initial budget isn’t set in stone, and it must be adjusted regularly as your financial situation changes. Your budget must continuously be tweaked to account for a change in jobs or moving to a new home.