It’s important to track where your hard-earned money is going and stay on top of your bills and expenses. Having a way to manage money is an important part of your lifestyle.
Figuring out how to create a personal budget can be confusing since there’s no one-size-fits-all solution, but it’s necessary to meet your long-term financial goals.
The Importance of Having a Budget
Having a method of measuring where your money goes helps you understand your finances better. However, if you’ve never had to adhere to a money management strategy, it might not feel worth it. Making a budget and sticking to it has many benefits.
- Helps curb overspending.
- Focuses on financial goals.
- Pay off debt and restore a low credit score.
- Build an emergency fund and save for retirement.
Your budget will enable you to identify unnecessary spending and see where your money is truly being wasted. This automatically frees up more of your paycheck that you can put toward other areas of your life. It also helps you define your goals and determine how your income can be used to meet them, whether saving more or wanting to make a big purchase. Lastly, it will build your debt into your necessary expenses, so you don’t have to worry about making those payments or having to skip one to pay another bill, thus putting you further behind. A budget is meant to help you be in control of your money.
How To Determine Your Monthly Budget
While there are many individual budgeting methods, it’s important to set yourself up for success by taking these few steps before settling on one. These will help you set your budget no matter what kind you choose.
1. Determine your net income (AKA take home pay)
The first step in budgeting your money is figuring out how much you have. Your net income is the money you get in your paycheck. This differs from your gross pay, which doesn’t have taxes or benefits taken out.
2. Track all your spending
Determining how much money you spend in a given pay period is the first step in understanding where you might be overspending. Go through your bank or credit card statements and note any spending that doesn’t fall into the necessary expense category. Look at how much you spend on subscriptions, eating out, entertainment, and other purchases that might be considered frivolous.
3. List all your fixed and variable expenses
Just as you need to track your purchases, you must also list all your expenses. This includes monthly bills like rent or mortgage, utilities, student loans, etc. These are your fixed expenses because the amount does not change month-to-month. Additionally, you must also account for your variable expenses. These amounts might change monthly and include groceries, pet care, gas, and more.
4. Set your short and long-term financial goals
It’s important to have clear goals you’re working toward with your finances, as they will be an essential part of your budget. Your short-term goals are what you wish to achieve in the next one to three years, like paying off debt or saving toward a big purchase like a home. Long-term goals don’t necessarily have a time frame; they’re larger aspirations like saving for retirement. Understanding what your goals are gives you a way to incorporate them into your budget.
Which Budgeting Strategy is Best For You?
A vital part of learning how to make a personal budget is deciding which strategy works best for you. There are several ways to manage your money; here are some of the most common.
The 50/20/30 Budget
This is probably the most common and easiest money management strategy. The budget percentages are divided into three categories: 50% needs, 30% wants, and 20% savings or debt. Your needs are your fixed expenses and potentially some of your variables like gas. The wants are the rest of your variable expenses, and the savings can be used for your emergency fund or debt payments.
The percentages can be tweaked if need be, but the overall goal is to have your spending broken down into the appropriate categories. A 50/30/20 budget template would help you understand which section of your income receives what amount.
The Envelope Budget
This method is more physical. There’s an envelope for each of the budget categories. You determine the amounts for each category based on what works best for you. Those envelopes are then filled with the appropriate cash for that category. When the money runs out, you cannot spend any more. This monthly budget works best for people with several fixed expenses or who prefer a physical budget representation.
The Pay Yourself First Budget
This strategy prioritizes your savings. When you get your paycheck, a percentage of your money automatically goes into your savings account. It’s easy to manage if you have direct deposit, which allows you to set up what percentage of your pay goes to which account, so all you have to do is set the percentage that you want to go into your savings, and it’ll be automatically transferred from your net pay. You then pay all of your bills and fixed expenses. Whatever is left over is what you can put toward your wants.
The Zero-Based Budget
This approach requires you to apply a specific use for each dollar you have. With this budget, you have every bill and expense accounted for, including your wants and savings. The total amount will equal the total amount of your pay, meaning that you’re down to zero at the end of the month. However, this doesn’t mean you don’t have enough money. It just means you’re tracking your spending closely enough to know where everything is going.
The Benefits of Sticking to a Budget
The obvious benefit of having a budget template that works for you and sticking to your personal budget is gaining control of your finances. It allows you to understand where your money goes and your spending habits.
It will also identify where you might be able to save money. Can you get a cheaper phone bill or meal plan to save money on groceries? Even if you currently don’t need a budget for specific amounts, using a template will put your spending in front of you so you can see if you want to reallocate any of your funds. It will also make it easier to build up an emergency fund or save up for an expensive home project and won’t set you back if something unexpected happens.
Lastly, if you struggle with debt payments or high credit card balances, setting a personal budget will help you focus on paying off those accounts so you can use your money for other things.
What if I Go Over Budget?
A monthly budget may be difficult to stick to, especially if you’re not used to tracking your spending. Going over budget isn’t the end of the world, but it’s important to be mindful of where you went and what you can do to avoid the situation next month.
You may need to make adjustments to your strategy if you find yourself unable to stick to it time and time again. Perhaps you need to try a different approach.
A budget is not meant to deprive you of the ability to enjoy your life. It’s simply meant to help you stay in control of your finances so you can meet your goals. Remember what you want to accomplish and use your personal budget to help get you there.
If you find yourself needing some extra cash outside of your budget, you can apply for a personal loan from Balance Credit to cover those expenses. Just make sure the monthly payments won’t throw your financial strategy off and that you’re able to make it fit into your budget.
*The information contained in this post is for general educational and informational purposes only. It is not an offer of credit, does not fully describe the products that we offer or facilitate, and it is not specific to any individual. These products are an expensive form of credit, and you should ensure that they meet your unique financial needs. We are not a credit repair organization and make no representation that we or any loan will improve or attempt to improve your credit rating. We do not provide financial advice or assistance regarding your credit situation. These educational posts are not a substitute for individualized professional advice.
