The Sunday Mail
Budgeting is the personal finance tool for taking control of your money. A budget is a written plan for how you will spend your money. It allows you to make financial decisions ahead of time, which makes it easier to cover all your expenses along with paying off debt, saving for the future, and being able to afford fun expenses. Budgeting consistently can help you turn your finances around and start the process of building wealth.
Why budgeting Is Important
A budget is a powerful tool because it allows you to determine how and where you want to spend your money. When you master budgeting, you make sure that every dollar is being used how you want it, and can track your spending to determine whether it matches your priorities. Often when people start budgeting they are surprised to see how much money is going to things that are not important to them, like eating out, mindless online shopping, or high-interest payments on credit cards. Budgeting allows you to monitor your progress on financial goals and stick to your financial plan. Eventually, it creates opportunities to eliminate debt and build wealth.
Create a budget in following steps
To create a budget, you have to start by creating a picture of your financial situation. It helps to have a list of the bills that you must pay each month, as well as your pay stubs, and either bank records or receipts from the past three months.
Step One: Determine Your Income
Begin by listing your monthly income. This should include any paychecks you receive, as well as income from other sources like:
Child support
Government benefits
Social Security
Investments
If you have a business, you should include the amount that you pay yourself each month rather than the business’s total income. If you do not get paid monthly, look at how much income you had last year and divide it by 12 to determine your likely monthly income this year.
Step Two: List Categories of Mandatory Expenses
Mandatory expenses are the expenses that you must pay every month and are vital to your housing, work, or legal obligations. These should include things like:
Rent
Electricity
Water
Heat
Internet
Food
Health insurance
Prescriptions you take daily or monthly
Childcare
Transportation to and from work
Child support
Alimony
You can usually identify mandatory expenses because they are fixed amounts, though some, like electricity or water, can vary month to month. If you have debt payments, such as student loans or credit card payments, they should also be included. Don’t worry about assigning values yet; simply make a list of the categories.
Step Three: List Categories of Discretionary Expenses
Next, identify your discretionary expenses. These are things you can go without but often choose to spend money on. They are wants, rather than needs, and may include:
Fitness memberships
Clothing
Cable TV
Streaming subscriptions
Eating out
Leisure travel
Personal grooming – thebalance.com
House cleaning
Home decor
You can also include savings goals, such as retirement accounts or a down payment fund, as discretionary expenses for now. There will not be immediate consequences if you scale back on these for a little while, though there may be long-term consequences if you ignore them for an extended period of time. Once your budget is under control, you can move these to mandatory expenses with fixed monthly contributions.
Step Four: Estimate Expenses
Once you have all your spending categories listed, it’s time to assign monetary values to them. Without looking at your spending patterns, write down what you think you must or will spend in each category in a month.
Step Five: Compare Estimated to Actual Expenses
Now, go back through your spending history for the last three months and determine what you actually spent in each category per month. You can use your receipts or bank statements to determine what you actually spent. Compare these to the numbers you estimated.
If there is a big difference between the two, that is a strong indicator that you need a strict budget to manage your spending and keep track of your finances.
Step Six: Assign Spending Limits Within Your Income
Once you have a sense of how much you are spending per month compared to what you think you spend, it’s time to set spending limits. Start by budgeting for mandatory expenses, then add up these values and subtract them from your income.
The amount you have left is what you can budget for discretionary expenses and savings goals.1 What you budget for expenses should not be more than your income, otherwise, you will end up in debt.
If you have debt payments, start by budgeting for the minimum payment, then add more if you have available funds leftover. If you have additional money after you plan your budget, you can add it to the categories for your financial goals like saving for retirement or building an emergency fund. After that, you can budget more for discretionary expenses and luxuries.
Step Seven: Look for Places to Cut Expenses
If you have more expenses than income, you will need to find ways to cut back on your expenses. Start by lowering the spending limits in the discretionary section of your budget or eliminating them entirely.
Next, look for ways you can reduce your mandatory expenses, such as:
A cheaper monthly insurance premium
Using less electricity at home
Taking the bus to work instead of driving
Spending less on groceries
If your expenses are still more than your income, you may need to increase the amount you earn by negotiating a rate, adding a second job, or taking on gig work.
Step Eight: Track Your Spending
Once you have your budget set for the month, you will need to track your spending and stop when you have reached the limit in each category. When you stop spending, that’s called sticking to your budget.
If you end up spending more in one category than you had planned, you can transfer money into that category to cover it from another category. For example, if you budgeted $400 for food for one month and you ended up spending $450, then you can move $50 from another category to cover it. In order to do this, you will need to check your spending before making purchases to see how much you have left.
Step Nine: Plan for The Next Month
After you have completed your first month of budgeting, it will be easier to plan for the next month. Look at how you spent your money and make adjustments for categories in which you spent more than you planned, and cut back on the categories that had additional funds in them.4
You should also look ahead to large expenses coming up, such as insurance premiums that are only due every few months or upcoming holiday expenses. Plan for these larger expenses as you set your budget for the next month.
