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One of the most daunting tasks related to budgeting and understanding your personal finances is actually sitting down and pulling in all of the information into one place. It takes time and effort, I get it. But in order for you to truly understand where your money is going and generalize trends from your spending, you must put all your cards on the table.
How to Create Your Monthly Budget
The cadence of your paychecks will matter here. You will need to approximate how much you’re earning a month. There will be some variance in your monthly income depending on how often you receive your paychecks (ex: monthly, biweekly, per assignment, etc.). For example, if you’re getting paid bi-weekly, there will be some months that you’ll be earning 3 paychecks, rather than 2. To illustrate this further:
- Let’s assume that your paycheck days are Fridays, then in January 2019 you must have received only 2 paychecks. In other words, January 2019 has 4 dates that fall on a Friday, so you should be noting 2 paychecks x paycheck amount for that month.
- March 2019 will have 5 dates that fall on a Friday, so depending on when your paycheck will arrive – you may have 3 paychecks.
Begin by creating a list of all of your monthly income sources. This may include:
- Your salary
- Your spouse’s salary
- Your side income
- Your spouse’s side income
- Income generated from renting out a property (ex: if you’re renting out an apartment or a beach house)
- Gifts (ex: money that you get for holidays, birthday, or another event)
You want to be thorough and realistic. Do not skip putting something on this list because you think it may not be relevant. If you don’t take this seriously, then you’ll begin to slip and start omitting an item here … an item there … Be thorough and be consistent!
Before you can plan your expenses, you need to know the total income that you’re working with.
Next, you’ll want to put all of your expenses on the table. I usually break these into fixed and variable expenses. From the perspective of budgeting, I think this is an easier way to organize them.
Fixed expenses are your monthly costs that do not change month to month. These are your long-term obligations, such as mortgage, cell phone payments, car payments, insurance premiums, etc.
Variable expenses are your monthly costs that literally vary depending on what you’re doing that month. These expenses may include your electric bill, food, presents, etc. Depending on the time of year, you may be utilizing more electricity during cold months to keep your home warm. And while you’re at it … maybe snacking a little bit more than you usually do during other times of the year and so your food expenses may go up.
Once you put your incomes and expenses into the worksheet, this is what it should look like:
Future Cast Your Budget
Now that you have your budget set up for the current month, you’d want to project (or “predict”) what your future expenses may be. This will help you better understand how much money you will be saving each month, and by the end of the year. If you don’t know how much you’ll be paying into a certain category, for example – your taxes, then use the information from the past as the best estimator of what that expense (or income) could be.
Businesses do this all the time in order to see what their profits are and to be able to plan for the future. Why shouldn’t you? You should be able to be equipped with information about your finances to plan your future.
Maybe you’ve been planning to buy a house but not sure when would be a good time to do this. Use your worksheet to “future-cast” your total annual savings into the coming years. This will help you to figure out how much time you’ll need to achieve your goal.
See Where You Can Create Extra Room in Your Budget
Ok, the point of going through the budgeting exercise is not to cry over how much money is bypassing your savings. Instead, you should be using this knowledge to your advantage.
- Is there something that you absolutely do not need? Maybe you can spare the clothing subscription box for a few months in the interest of saving more money.
- Could you save on groceries? Maybe you could buy most frequently used items in bulk at Costco. Or think about switching to generic brands.
- Could you save on utilities? You can set your air conditioning to a few degrees lower (during winter) or higher (during summer) while you’re away to make sure you’re not wasting energy.
Conclusion: Maintain and Learn!
At the end of every month, make a habit to sit down and reconcile all of your expenses. This will take 30 minutes to an hour, but it so worth your time! You’ll need to update your future-cast table with “actual” earnings and expenses. This will help paint a more realistic picture of what your savings will be.
I would highly recommend maintaining your budget each month. You will become more aware of your spending habits and learn the trends. There will be variations month to month, and you may even have some unpredictable events occur that you could not have “forecasted” budget.
We live and we learn. Adjust your budget accordingly. Remember, it is better to have some form of a budget, then no budget at all!
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