A monthly budget is a plan meant for both expenses and income to be balanced in order for long-term financial goals to be achieved. Creating a personal budget helps monthly expenses get sorted into categories that help define spending habits. That way, they can be shifted according to how monthly goals can be met best.
Personal Budgeting Is Essential
One of the most important parts of financial literacy is having a personal budget that undergoes regular review. It's the best way to prevent overspending, which can lead to a multitude of issues. Have you ever ended up overdrafting your accounts or borrowing funds? A proper budget is the best way to get out of the proverbial "red zone."
The Ideal Way To Create A Personal Budget
Establish What Your Monthly Expected Income Actually Is
While this sounds like a given, it's well worth expounding on. Any budget should start with the very basic premise of how much there is to work with in the first place. If you just have the one job that's salaried, that information is easily found on your paystub. Basically, it's how much you get for every paycheck. If payments are done twice a month (say the 15th and 30th, for example), then the paycheck amount should be multiplied by two.
Paid bi-weekly? Multiple your paycheck by 26, then divide that by 12.
For people who are self-employed, have more than one job or whose income is irregular, determining net income is a bit different.
List Every Single FIxed Expense
As the term suggests, fixed expenses are the ones that stay the same each month. This can include, but is not limited to:
Automatic deposits into a savings account
Credit card debt payments
Repayment of student loans
It doesn't matter where this list happens-whether it's a budget worksheet, a spreadsheet or even a piece of paper. The most vital part is that it's all laid out.
Add All Fixed Expenses Together
Find out how much you spend each month on fixed expenses, such as rent or mortgage payments, utilities, and car payments. That number is unlikely to change monthly, so it can be used as the monthly budget's foundation. The formula should be like this:
Net Income - Fixed Expenses = Leftover For Variable Expenses
List Every Single Variable Expense
Variable expenses don't stay the same with each passing month. This includes shopping, gifts, restaurant and coffee shop trips, and more. A good rule of thumb for estimating this is to revisit credit card statements, online banking and even receipts. List everything that you spend on in the last month that was not a fixed expense. Add them up then add the sum of that to the total spending on fixed expenses.
Is the final number more or less than your net income? If it's more, then you need to pause and reevaluate because that signifies living beyond one's means.
A personal budget is incredibly important for a number of reasons. It's important to craft one starting with establishing how much monthly income there is to work with. Then, determine fixed and variable expenses while comparing those to total net income.
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