Today we will be looking into “How to create a Monthly Budget”. Every household requires money to fulfill its day to day expenses. There are various expenses in the household which needs to be taken care of. To fulfill all such expenses, creating a budget is essential. This Budget will help you in managing your finances effectively and it will also ensure that you live within your means. So here is a comprehensive guide to help you to create a monthly budget.
Step by Step Guide to Creating a Monthly Budget
- Assess Your Income
- Foremost Step is to calculate your Total Monthly Income. It may include:
- Salary – Net Salary after deducting taxes
- Freelance Jobs – Any income earned through part-time job, freelance work or any other job.
- Passive Income – Income earned through Investments such as Dividends or any Income earned through Rentals of property such as house, office or land.
- Foremost Step is to calculate your Total Monthly Income. It may include:
- Track Your Expenses
- Second Important step is Tracking of Expenses. This is important step as it helps in understanding where your money is spend. Expenses can be divided into following categories.
- Fixed Expenses – Fixed expenses include Rent, Mortgage, Utilities, Insurance Premiums, Loan payments (EMIs).
- Variable Expenses – This type of expenses includes Groceries, Dining out, Entertainment, Travel, Holiday Expenses, etc.
- Discretionary Expenses – These expenses are of less important in nature such as Hobbies, Subscriptions and other non-essential purchases.
- Second Important step is Tracking of Expenses. This is important step as it helps in understanding where your money is spend. Expenses can be divided into following categories.
- Set Financial Goals
- Apart from understanding the total Income and various expenses, setting up Financial Goals are also very important. Financial Goals can be divided into two parts:
- Short Term Goals – Short Term Goals are the goals that can be achieved from few months to one year of savings. This is important for achieving goals such as Emergency Funds or Saving money for a Vacation, etc.
- Long Term Goals – Long Term Goals are those goals that are achieved over few years to 20-25 years, such as building or purchasing a dream home. Planning Funds for Retirement is one of the most important long term goal. These goals take consistent and determined planning to be achieved.
- Apart from understanding the total Income and various expenses, setting up Financial Goals are also very important. Financial Goals can be divided into two parts:
- Categorize Your Spending
- Dividing your expenses into essential and non-essential categories is very important. This helps in prioritizing your spendings. A very important budgeting framework is the 50/30/20/ rule. This rule states that:
- 50% of Income needs to go for essential spendings such as Housing, Groceries, Utilities, etc.
- 30% of Income goes towards less essential expenses such as Dining out, Entertainment, etc.
- 20% of Income takes care of Savings, Investments and Paying off Debts.
- Dividing your expenses into essential and non-essential categories is very important. This helps in prioritizing your spendings. A very important budgeting framework is the 50/30/20/ rule. This rule states that:
- Create The Budget
- After understanding all of the above important aspects, from Income sources to expense patterns, now you can move towards creating a realistic Budget. This is an important step as you will be allocating your available Funds/Income to various expense categories based on your assessment. For Example you can divide your Income in the following way:
- Housing – 25-35% of the Income
- Transportation – 10-15% of the Income
- Food – 10-15% of the Income
- Savings & Debt Repayment – 20% of the Income
- Insurance – 5-10% of the Income
- Entertainment/Miscellaneous – 5-10% of the Income
- Here you can also take help of Budgeting Tools and Apps like Mint, YNAB (You Need A Budget) or Every Dollar to simplify the above process.
- After understanding all of the above important aspects, from Income sources to expense patterns, now you can move towards creating a realistic Budget. This is an important step as you will be allocating your available Funds/Income to various expense categories based on your assessment. For Example you can divide your Income in the following way:
- Monitor and Adjust
- This is a very crucial Step in building an effective and robust Budget. In order to achieve an effective budget, you need to “Review your Budget” every month. Compare your actual spendings to your budgeted amount. Check where the spending has gone up vis-a-vis the allocated amount. Make necessary adjustments accordingly. Identify areas where you can cut back your unnecessary expenses and how these funds can be reallocated to meet your Short Term and Long Term Goals.
Conclusion
Creating an effective budget requires persistent and disciplined way of spending your money. By following above steps mentioned here, you can create a realistic budget that helps you to reach your financial goals. Regular monitoring and adjustments are key in making of an effective budget and reaching financial stability as well as financial freedom. You can also refer to following resources:
PS: My next article will be on “Tips for Sticking to you Budget”. Happy Reading..!!