Developing a monthly budget can help you get out of debt and build wealth. However, creating a budget is much simpler and easier than following it. When you get ready to budget, remember to be honest. Self-deception is the worst thing you can bring to the process. Budgets only include money you realistically expect to receive. They don’t include unforeseen windfalls like chance inheritances or winning the lotto. In order to get the maximum benefit from a budget, you’ll need to practice some self-control and self-discipline to follow it.
Now here are some steps in developing a monthly budget.
- FIGURING OUT WHAT YOU HAVE
In order to develop a monthly budget, you’ll first need to figure out what you have by calculating your monthly budget. It’s best to budget by the month. So, you’ll need to determine your monthly income. Remember to look at your take-home income, that is, what you get after taxes have been taken out.
2. LIST YOUR MONTHLY EXPENSES
It can be difficult to remember all of your monthly expenses. Start by listing out the bills you pay each month. These will likely include:
- Mortgage and/Rent
- Auto expenses: car payment/insurance/fuel/gas
- Utility bills
- Student loans
- Subscription services
- Food: groceries and eating out
3. COMPARE YOUR INCOME AND EXPENSES
Once you’ve identified all of your expenses, add them up. How do your expenses compare to your income? Do you have a surplus or a deficit?
If you have a surplus, consider how you’ll invest or save the surplus money.
If it’s a deficit, study the expenses and decide what to cut. If one of the biggest outflows is lunch at work, consider brown-bagging it four days a week. If it’s a cable TV bill, go for a cheaper plan or cut the cord. A big cellphone bill? Find a cheaper plan or a less expensive provider.
Managing expenses might not be enough. If you can’t get where you need to be, turn to the income. Can you work overtime or find a second job a few nights a week? It might be necessary.
Your income should always exceed your expenses. Budgeted expenditures should never exceed 90 percent of your income. Remember, this is a goal and you might not make it every month, but that’s why you keep a savings account as a backup. Only tap that emergency fund when absolutely necessary, and deposit extra money to it during any month when you take in more than you budgeted.
- Don’t confuse luxuries with necessities. Eating is a necessity. Eating at a four-star restaurant is a luxury. If you have to trim expenses, pare back on the luxuries.
- Watch the small stuff. If you like passing time in coffee shops, add up what you spend each month. The sum of all those $4 lattes might shock you. So drink water sometimes, or work at home and make your own coffee.
- Restrain yourself. Just because you earn a raise doesn’t mean you have to find new ways to spend money. Consider saving part of it or contributing more to a workplace 401(k) retirement plan.
- Use cash. Credit and debit cards are great conveniences, but also easy to overuse. When you spend cash, or write checks and enter them in a register, you’ll more accurately see what your dong with your money. Finally, using cash isn’t an excuse to visit an ATM when you get the urge to spend. Use your budget to set limits on yourself and keep receipts to monitor your progress.
- Manage your own debt. If you have a growing unpaid balance on your credit cards, part of your budget should aim at bringing the balance to zero. Paying revolving credit card debt is one of the least useful ways to spend your money.