If you want to gain more control of your spending and tick off your financial goals, then creating a budget is necessary.
A budget is basically, an estimation of your income and expenses over a specified period of time, typically a month. Budgeting helps you plan your expenditures and savings while also helping you to identify your spending patterns. Budgeting is a vital tool to keep your finances in order and achieve your short and long term goals.
The first step you can take towards budgeting, is understanding the process.
Here’s how to make a monthly budget:
Step 1 - Write Down All Your Sources of Income
If you earn a monthly income, make sure you use your net income (take home pay). And if you do any freelancing work on the side, make sure you record that as well.
Step 2 - List out Your Expenses
Next, make a list of all your expenses. From your utility expenses to your entertainment costs, make a holistic list of all the things you spend on.
Step 3 - Divide Your Expenses Into Two Categories: Fixed and Discretionary
The next step is to categorise your expenses into two buckets -
Fixed expenses are those that stay more or less the same every month. For example, your rent, utility bills, internet expenses, transportation, etc.. In other words, these are essential expenses.
Discretionary expenses are those that vary from month to month and would include things like entertainment, dining out, gifts, petrol, travel, etc..
If you are not sure how much you spend on each of these categories, look at the receipts of the last two months and make an approximation based on that.
Step 4 - Total Your Monthly Income and Expenses
Next, total your monthly income and expenses. If your monthly income is more than your expenses, that’s a good sign. The surplus can be added to your savings. On the hand, if your expenses outweigh your income, then you need to make some changes.
Step 5 - Make Adjustments to Your Expenses
After totalling your expenses, if you find that your expenses are higher than your income, relook at your discretionary expenses and find ways to cut back. Since these expenses are non-essential, it would be easier to find categories where you can reduce your spending.
Step 6 - Review Your Budget
Now, It’s not enough to just create your budget at the beginning of the month. It’s important you go back and review it from time to time and make sure you're on track. If you are not able to stick to your budget, make sure you understand the root cause and address it.
So there you have it! When you go step by step, budgeting can actually be simple and can provide you great insights into your spending habits. It keeps your finances organized and keeps you focussed on your financial goals.
