Making a budget is a crucial first step towards organizing your finances and a wonderful method to keep track of where your money is going each month. You may find it simpler to reach your goals with a budget, including setting up an emergency fund or saving for a down payment on a house.
Creating a budget is not as hard as it may appear. Furthermore, once you have one, the majority of the work is done, and you may make minor adjustments when your income or spending patterns change. You can start with a variety of websites and budgeting programs, or you can make your own spreadsheet.
We will go over how to make a budget with a spreadsheet, although many of the procedures are similar to various budgeting systems. Feel free to get creative; you may obtain templates from Google Sheets, Microsoft Excel, and other websites or start from scratch.
Here are five stages for creating a budget.
How to Make a Budget
1. Calculate Your Net Income
The first step is to determine how much money you earn each month. You’ll want to compute your net income, which is the money you make after taxes. If you receive a regular paycheck from your job—whether you work part-time or full-time—the amount indicated is likely your net income.
Keep in mind that whether you’re registered in your employer’s health insurance plan, flexible spending account (FSA), or retirement account, the funds are frequently deducted directly from your paycheck. To get an accurate picture of your take-home salary, remove those deductions.
If you freelance or do not receive a regular paycheck, you must deduct taxes from your total income. The IRS reports a self-employment tax rate of 15.3%. You may use the TaxAct calculator to predict how much tax you’ll have to pay each year. Then, divide by 12 to obtain a monthly estimate.
Matt Mayerle, Personal Finance Editor at CreditNinja, advises, “Understanding your net income is the foundation of effective budgeting. At CreditNinja, we emphasize the importance of accounting for all deductions and taxes to get a true picture of your available funds.”
2. List Your Monthly Costs
Next, create a list of your monthly costs. Here are a few frequent expenses:
- Rental or mortgage payments
- Loan payments (include student, vehicle, and personal)
- Insurance (including health, house, and vehicle)
- Utilities (including electricity, water, and gas)
- Telephone, internet, cable, and monthly streaming subscriptions
- Child care
- Groceries
- Transportation (including gas, rail tickets, and bus expenses)
- Household items
- Dining
- Travel
- Gym memberships
- Miscellaneous (including gifts, entertainment, and clothes)
It’s also a good idea to include information on how much you save each month, whether in regular or high-yield savings accounts or a personal retirement plan like a Roth IRA.
3. Label Fixed and Variable Expenses
Once you’ve created a list of your monthly costs, designate them as fixed or variable. Fixed costs include bills that cannot be avoided, such as rent, utilities, transportation, insurance, food, and debt payments. Variable costs, on the other hand, include your gym subscription or the amount you spend on dining out, and these are more flexible.
If your budget is tight, you could always cut back on eating out and gym membership, but you’ll probably always need to pay your mortgage or rent.
4. Determine Average Monthly Cost for Each Expense
Once you have distinguished between fixed and variable costs, make a monthly spending list for each category. Check your credit card and bank statements to see how much you’ve spent.
Fixed costs are easier to track on a budget than variable spending since they are consistent month to month. For example, debt repayment on a house or vehicle loan will cost the same amount each month. However, fixed utilities (electricity and gas) and variable expenditures (dining and household items) sometimes change, so you’ll want to do some arithmetic to get the average.
Review three months of spending to determine the average monthly cost for these categories and any other areas where your spending varies. To get the average amount you spend on food, sum up all your grocery purchases over the last three months and divide by three. If your typical monthly grocery bill is $433, consider setting your budget limit to $450.
5. Make Adjustments
The final stage in developing a budget is comparing your net income to your monthly spending. If your spending exceeds your income, you will need to make some modifications.
For example, if your total costs are $300 higher than your monthly net salary, you should analyze your variable expenses to discover strategies to save $300. This might mean rethinking how much you spend on food, household items, streaming subscriptions, and other flexible expenses.
If you plan to take a loan, you should know what your credit score means to prevent debt. However, if you don’t have a loan and wish to prevent debt, cut some of your monthly expenditures and frequently modify your spending habits.
Conversely, you can boost specific portions of your budget if you have extra money after outlining your costs. Ideally, you would utilize this extra money to increase your savings, especially if you do not have an emergency fund. However, you may spend the money on non-essential expenses such as dining out or travel.
Mayerle notes, “It’s essential to be realistic about adjustments. While it might be tempting to cut out all non-essential spending, setting a budget you can stick to is more important. At CreditNinja, we recommend finding a balance that allows for both saving and enjoying your income responsibly.”
Next Steps
After you’ve finished planning your budget, the following step is to stick to it. You may hold yourself accountable in several ways. For starters, you may set up reminders with your credit card and bank accounts when you exceed a specific spending limit. You should also record all of your spending in your spreadsheet or budgeting tool immediately after making a purchase. And if you split spending with someone else, ensure you’re both on the same page about the budget and keep each other on track.
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