The thought of trying to create a monthly budget stirs up feelings of fear in most people because they believe it’s a horribly daunting task. In reality, it doesn’t have to be a scary process. It’s actually a lot easier than you think.
Here are 5 simple steps to help you create a monthly budget in less than 20 minutes.
In Part 1 of this series, we talked to you about Assessing Your Financial Situation. Doing everything that we mentioned in that post will allow you to complete steps 1 – 3 in the budget creation process.
In case you haven’t read Part 1 yet, you’ll need to:
Download Our Budget & Debt Tracking Spreadsheet!
1. Write down your TOTAL monthly income
2. Figure out what your monthly expenses are (Fixed, Variable, and Debts)
3. Calculate the difference between your income and expenses
The number that you get in step 3 will tell you what your spending habits currently are. A negative number means that you overspend and a positive number indicates that you should have extra money left over at the end of the month.
When you create a monthly budget (and actually follow it) you can dramatically increase the positive number that should be left when the month is over. You can do this easily by adjusting what you decide to spend your money on each month.
4. Revise Your Budget Items
After completing Step #2, you’ll be able to see exactly where your money is going each month. At this time, you’ll have to go through each section in your budget tracker and decide what is truly necessary.
If it isn’t essential, it needs to go!
Fixed Expenses
Look at what you have in your “Bills & Utilities” category. This section might be harder to revise because most of the items are probably essential for your everyday living. But, there might be some areas where you can cut out or reduce certain expenses. Read: How to Determine Budget Percentages
As a rule of thumb, housing costs (rent or mortgage) should be somewhere between 20 – 35% of your monthly income. If your costs are much higher than that, they can put a serious strain on your budget. Consider whether or not you can refinance your mortgage, renegotiate your rent or relocate altogether.
Your utility expenses (gas, electric, water, trash, telephone) should be in the 4 – 7% range. We cut a lot of unnecessary things out of this part of our own budget in this section. We canceled our cable subscription, lowered our internet speed, changed phone providers, canceled magazine subscriptions & various other things.
The lesson we learned was:
Cutting expenses have the same effect as increasing your income.Click To TweetVariable Expenses
In all honesty, the amount that you typically spend on variable expenses is where you’ll most likely be able to cover the most ground.
This is due to the fact that YOU directly control the amounts that will be spent on the items in this category.
For instance:
If you currently spend a significant amount on groceries/eating out, make your budget a realistic amount and spend ONLY that. And by realistic, I mean don’t try to say that you’re budgeting $20 to feed your entire family for the month.
Rules of thumb: Food costs (at home and away) should be 15 – 30% of your take-home pay. Transportation costs (car payment, gas, insurance, repairs, or bus fare) should fall somewhere between 6 – 30%. Entertainment costs should be 2 – 6%.
Savings
Our financial journey started shortly after my mother passed away and we couldn’t afford plane tickets for her funeral. Statistically, 6 out of 10 people can’t afford a $500 unexpected expense and we were one of those 6 people. To help you avoid a similar situation, you should include saving for an emergency fund in your monthly budget.
Initially, save at least $1,000 and then increase that amount based on your particular circumstances. Do this BEFORE you start making extra payments on your debt!
Debt Repayment
A large part of your focus will go towards paying off any outstanding debts that you have. There are various strategies for paying off debt (like the ones we’ll cover in Part 3), but first, you have to make sure that you’re at least covering the minimum monthly payments for each debt before you start allocating extra money to pay them off faster.
Don’t rob Peter just to pay Paul.
5. Track Your Expenses Throughout the Month
During this process, keep in mind the fact that your budget is not the boss. YOU are telling your money where you want it to go, you’re just using the budget to give the directions.
At any time, you can make adjustments if you miscalculated what you need or if you simply budgeted too much in a category.
How will you know when your budget isn’t adding up?
You’ll have to keep track of what you’re spending throughout the month to see how your actual spending compares to what you’ve budgeted. We suggest using apps like Goodbudget or EveryDollar and inputting your actual totals into the spreadsheet that you downloaded from us at the end of each month.
Once this is done, you can compare the difference. If your end of month totals are higher than the budget then you spent too much. Either you were just being reckless with your spending or you misjudged what you actually needed to spend.
Your budget should be an on-going process. Don’t think that you can just create it and leave it the same forever.
Sit down & review your budget EVERY month. Put it on your calendar and set aside time for this because it is extremely important for your financial journey.
Keep your budget up to date and make adjustments whenever your income or expenses change.
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With your newly created budget, you should be able to start having money leftover at the end of the month instead of realizing that you have money missing. This will put you in the perfect position to start aiming for your financial goals! Following a budget was a major part that helped us pay off $130,912 worth of debt and become debt free.
In Part 3 of our series we are going to cover “The Best Way To Pay Off Debt”. We’ll be talking about the difference between two of the most popular debt payoff methods.
Stay Wealthy!
— DJ