Budget in a financial term means “creating a plan to spend your money.” Other people would define budget as a macroeconomic concept that defines the trade-off made when goods are being exchanged.

Following the popular saying that “the first key into building wealth is to plan for it“, this brings a budget in. Budgeting involves managing your monthly expenses, planning for the unexpected and making sure the standard of living is met without going into debts.

Generally, in a lay man language, a budget is a financial plan that shares or allocates your income into daily expenses, investments and saving over a particular period of time.

By setting a standard limit to your spending and having a priority for your financial needs through a budget, you can be rest assured that your budget will work efficiently and effectively.

Finally, having a monthly budget would help you track your spending and make sure it is well aligned so that you do not end up being in a long term financial debt that might end up costing one’s life.

The first key into building wealth is to plan for it

Assessing Your Income: Knowing What You Have to Work With For Your Monthly Budget

The fundamental step to creating a reliable and effective assessing your budget is by assessing your budget or income. By identifying each of your income sources or the income you receive on a regular basis, you tend to know how important that can be. As an organization, company, employee, student and individual, this assess starts with you. The money you receive on a weekly, monthly or yearly basis all needs to be accounted for properly. Additionally, income streams such as freelance or contract work, investments dividends, rental income from properties, benefits from government, support for children and major side hustles like buying and selling, aren’t excluded from a proper income assessment. Below are the steps to take in order to properly do an income assessment.

Too many people spend money they haven’t earned to buy things they don’t want to impress people they don’t like.”

– Will Rogers

By Calculating Your Gross Income

In a simple definition, Gross income is the total amount of money you earn before any deductions are made, these includes health insurance premiums, retirement contributions, and taxes. These represents the overall earning capability. This helps many financial bodies or lenders to determine your borrow power.

By Determining Your Net Income

The next step is to focus on how you can determine your Net Income. Net Income for your monthly budget is the amount of money you take home after all deductions have been made. This is the Gross income, which is the total amount of money earned minus the total deductions made, it results to your Net income. In other words, your net income is the available money after covering all your living expenses including the repayment of debts, and what we call a discretionary spending, which is defined as a non-essential expense that is being incurred by an individual, organization or household.

Account For Irregular Income

Irregular income in such a way that the income stream doesn’t seem to be constant, or does not have a standard payment time. For freelancers, contractors and seasonal work individuals, this applies to you. It may sound complex as it significantly vary months after months. There is a way go make it easy to work on, and this is by calculating an average monthly income which will be base on your income stream over the past 6 to 12 months.

Extra Sources of Income

It is important to always account for extra sources of income. This is very important for us to remember. Extra or additional sources of income such as gifts, tax refunds, bonuses, part-time occasional work. Though it shouldn’t serve as the core or backbone of your budget, but by recognizing them gives the tendency to plan for how they can be well managed and utilized.

Establishing A budget Baseline

Now that you have a good knowledge of what Gross and Net Income means, along with the extra or irregular income, a baseline is needed. This baseline can be described as the amount of money you have available each month to effectively allocate across your expenses, investments and savings. If you are looking forward to set a realistic and achievable goal, having an utmost knowledge of your financial capability is essential. It ensures that when a sudden change in income occurs, especially a decrease in income, your budget, if properly managed and computed will be flexible enough to adapt.

Planning For Income Changes

Life is unpredictable. We can’t foresee the future in as much as we are not in control of what the future holds. The same thing happens with your Income. It can be a potential rise or dip or a job change that may arise due to certain reasons. It is very smart to think ahead in everything we do. Having a very clear picture of what your current income looks like enhances you in anticipation of these changes.

Let’s give an instance. In a scenario whereby you are anticipating a salary increase, considering how the extra money on savings, investments, paying off debts are being allocated before the salary arrives, with respect to a potential decrease that might occur, it is better to start the adjustment of your budget immediately to avoid financial stress later.

Tracking Your Expenses: Where Is Your Money Going?

Tracking your expenses is a very crucial step. Understanding where your money is going to is very important as well as gaining control over your expenses. By ensuring that your financial goals are in line with your spending, follow these simple steps;

• Gather All Financial Records

You can start by collecting or gathering all your financial records for the month. These includes your credit card bills, bank statements, receipts and other documentations required. The reason behind this is that it gives you a clearer picture of your financial workflows. It makes sure that no financial expense is over looked.

• Categorize Your Expenses

Once you have followed through the step of gathering and you now have all your financial records, there’s need for you to categorize them into groups. The common categories include;

1. Housing (rent/mortgage)
2. Utilities
3. Groceries
4. Dining Out
5. Transportation (Car payments, fuel, public transport)
6. Entertainment
7. Insurance
8. Discretionary Spending – see 1.0.0.2
9. Less Frequent Expenses, e.g, car maintenance, annual subscriptions and gifts.

• Identify Fixed and Variable Expenses

To identify fixed and variable expenses, you need to be able to differentiate between them. Fixed Expenses are expenses that remain consistent each month while Variable expenses are the expenses that fluctuate from month to month. Fixed Expenses can be rent or mortgage payments, car loans, and insurance premiums while Variable Expenses can be groceries, dining out, entertainment, and utilities. Lastly, Fixed Expenses are usually non-negotiable and must be prioritized in your budget, while, Variable Expenses can be negotiable and doesn’t stay constant for a long period of time. Therefore, understanding which of your expenses are fixed and variable, allows you to see where flexibility is enhanced in your budget.

• Track Your Daily Expenses

Consider tracking your expenses in order to gain a detailed understanding of your spending habits. Below are ways in which you can track your daily expenses. You can make use of the tools below.

1. A Budgeting App
2. A spreadsheet
3. A simple Notebook

Every purchase must be recorded no matter how small it might look or seem. You would be able to see areas where you might be spending more than you realize. For Instance, an individual who buys coffee on a daily basis, to him/her, this act might not really matter as it might be viewed as a little expense, but over the period of time, it accumulates to a substantial amount.

• Review Your Spending Habits

You can review your spending habits at the end of each month by carefully reviewing your tracked expenses and comparing them with your income. Check if you have consistently overspent, check for areas where you can cut or eliminate expenses. This process is very essential as it helps you identify your spending patterns.

• Look For Opportunities To Save

As you review your expenses, find opportunities to save which might involve lower rates for certain events such as reducing energy consumption, negotiating lower rates for services like cable or internet. You might consider the need for finding cheaper alternatives for things you regularly purchase, for instance, switching to a more affordable grocery store or taking public transportation instead of driving.

• Adjust Your Budget Accordingly

The next step is to adjust your budget accordingly as it is believed that you now have an understanding of where your money is going. Set limits and stick to them. This might involve the need to reallocate the non-essential funds to the more important ones. Therefore, revisiting and adjusting the budget regularly ensures that it remains a dynamic tool that evolves with financial situation.

• Automate Your Savings and Payments

Consider automating your savings and payments to help you stay on your financial plan. You can set up automatic transfers to your savings account each payday and you can also schedule your fixed expenses. The advantages of automation is that, it reduces the temptation behind spending money before it is being allocated to savings or bills.

• Monitor and Adjust Regularly

It is essential to continuously monitor and adjust your expenses. Please, understand that it isn’t a one day or one time thing. It has to be done over and over again. This ensures you stay on top of your finances and confidently make informed decisions.

Categorizing Your Expenses: Needs vs. Wants

This is a crucial step in creating a balanced and effective budget. Let’s define Needs and Wants. Needs are the essential expenses required for a basic living such as health care, utilities, groceries, housing, transportation, etc. On the other hand, wants are discretionary expenses as we’ve discussed above. By clearly distinguishing between these two, you can prioritize your spending and there by ensure that your essential expenses are well covered.

Creating Your Budget: Allocating Funds to Each Category

This involves more than just listing your income and expenses. It involves the allocation of funds across several financial goals. By allocating these funds properly, it ensures that every cents you earn has a genuine purpose. This can be said to be the backbone of an effective budget. We will go through several measures that are involved in the rightly allocation of funds.

• Prioritize fixed expenses

This is the first step in allocating your budget. As we’ve earlier mentioned. It involves utilities, rent or mortgage, car payments, etc. Since looking at these expenses, they are necessary for our day to day lives, they are non-negotiable. Therefore, calculate the total amount of money needed to cover these costs for this step and allocate them appropriately.

• Allocate funds to savings Goal

You can go ahead to allocate funds for savings jut after you’ve completed the first step. This step is crucial for the impact of a financial crisis that may occur, it is very important for a long term financial health. There’s a rule of thumb which states that “aim to save at least 20% of your income.” Well, this depends on your financial stand and goals. If you feel 20% might not be feasible, do well to review the percentage according to you financial strength. A useful tip is to automate your transfers to a trusted savings account, this makes it much easier and can help you stay committed.

• Fund your Variable expenses

These expenses fluctuate each month. They are more flexible than the Fixed costs. This gives a control over how much is being spent. In order to allocate funds for variable expenses, it is important to go back to your spending habits, estimate how much you spend typically in each category. For instance, let’s say you have been spending so much on dining out, try opting for more meals at home to set aside or free up money for other priorities. This ultimately helps you stay within your budget.

• Consider the 50/30/20 rule

The 50/30/20 rule is a popular budgeting method that guide your allocation process. this rule suggests your income into 3maincategories. we have 50% for needs, 30% for wants and 20% for savings and debt repayment. See above for events under wants and needs. While this rule is a very useful guideline, it helps to streamline it to your specific financial situation.

• Plan for irregular and unexpected expenses

Life isn’t a rollercoaster, it is full of surprises, as you allocate money for fixed, variable and savings, assign for unexpected expenses. Anything can happen anytime. We might not plan for it to occur but when it does, it’s wise to have been prepared. While it is impossible to predict these expenses, having a reliable emergency fund in place is a smart move. We can ideally say, 3 – 6 months worth of living expenses.

• Allocate for debt repayment

If you have any outstanding debts, it is advisable to allocate funds towards paying them off. Remember that the faster your debt is being reduced, the less you’ll have to pay an interest over time. The use of methods like debt snowball or debt avalanche can be considered. Therefore, allocating a considerable and consistent portion of your income to debt repayment each month will gyrate you into making a steady progress and avoiding debt accumulation over time.

• Review and Adjust accordingly

Always revisit and review your budget on a basis.

• Use tools and technology to help

Today’s digital era, the use of tools and technology to help u stay informed and work effectively has been advantageous. Therefore, in budget allocation, it’s not left out. These tools or apps can create and manage your budget list. They automate the process and tract you budget for you.

• Stay flexible

As mentioned before, stick to your budget as closely as possible, be loyal to it, and make sure you are very flexible with it. If an unexpected event occur, don’t be overwhelmed or afraid of adjusting to your allocations temporarily to address the situation.

Conclusion

In conclusion, if you’ve carefully followed or read through this article successfully, by now you should be able to create a monthly budget for yourself. This guide has provided a clear and concise process to help you manage your money effectively. By following these steps, you will gain a better knowledge of your financials and you will be able to spot if you have been doing it the wrong way. Don’t feel bad, there’s a chance to always adjust. All you need to do is to understand your financial situation and allocate your income in such a way that supports your priorities and you will see that your financial future becomes secure.