Creating a personal budget is one of the most effective tools to help you manage debt, reduce expenses, or even guide your investments.
Taking the effort to come up with a plan, however, can be challenging. For some, the stress of knowing their financial reality can be overwhelming. Creating a monthly budget and sticking to it may seem like an excruciatingly painful chore. But for those who take the time to figure out their finances, the experience can be an empowering one. Knowing how much you can spend each month helps keep you on track financially.
When you set out on your first budget it’s best to take stock of all assets, including your bank account balances or any of your investments. Then you’ll have to look at your expenses and your debt load to come up with where you need to prioritize.
Identifying how much money you make on a monthly basis is one of the most obvious components to determining your budget. This step is easy for people on salaries, while it can be a bit more challenging for people paid hourly. Whether you’re hourly, or if you own your business, there are strategies for determining an average monthly income that will help you set your budget. The easiest way is to take a look at your income over the past six months or even further and determine your monthly average.
Identifying your overall monthly expenses is crucial to a financial plan. Much of this can be determined by looking at your bills—utilities, rent/mortgage, phone, transportation—but you’ll likely want to dig a little deeper.
Tracking your general spending throughout the month will give you a more detailed perspective of your habits. You can pull plenty of this information from your bank statements, if you regularly use your debit and credit cards. Beyond that, though, you should hang on to your receipts for a month or two and track your spending.
Block all spending into key categories, such as groceries, entertainment, etc. This method will help you determine the areas where you should think about cutting back or spending more. Once you identify a category that’s out of the normal, you can then drill down to see where you’re spending.
One of the scariest elements of your budget process might be finding out what you owe in debt and how much you need to pay every month to manage that debt. Collect your bills and make a list of each of your borrowed items. List the total owing as well as your monthly payments. Find out in detail what you owe on credit cards, mortgages or car loans. Knowing how much you need to spend each month on these items will flesh out your budget.
Once you’ve made your final totals for income and expenses, you can finally determine if you’re living within your means or if you need to make sacrifices to stay on track with your bills and debt load. If you’re doing well, you’ll likely see you have extra money left over at the end of the month.
Making a budget can appear daunting at first, or it may seem too much of a reality check, if you’ve been overspending or taking on too much debt. Pushing forward and mapping out your finances, though, will help you considerably when determining how to get rid of debt, how to better manage your income or how to invest any extra money.