Budgeting is the easiest way to stay on top of your finances and take control of your money. There are different budgeting methods available depending on your preference and financial goals to help you manage your money effectively. You must first establish your goals before you create a budget.
Knowing how to budget is key to helping you achieve important financial milestones. Here’s how to create a monthly budget based on your income and expenses.
1. Determine your total income
The first step is to calculate your net income, which is the amount of money you earn fewer taxes. If you are self-employed or don’t receive a regular paycheck, you’ll need to estimate how much you’ve earned in the past months and subtract taxes from the average. This gives you a clear picture of your take-home pay.
2. Decide on a budgeting system
Once you know how much you have and what your goals are, choose a budgeting method that works best for you. Try out the different budgeting methods and tailor your budget to your specific needs and goals. The popular options are the zero-based budget (income minus expenses equal to zero), 50/30/20 budget rule (50% to needs, 30% to wants, 20% to savings and debt repayment) and the Envelope system(a form of the zero-based budget that’s focused on using only cash).
3. List your potential expenses
The next step is to list out all the things you’ll need to spend money on for the month and label whether they’re fixed or variable. Fixed expenses are bills you can’t avoid while variable expenses are more flexible. Once that is done, start grouping your expenditures into categories. Then prioritize each category into essentials, nice to haves, non-essentials.
4. Allocate funds
Start allocating funds to the essentials before moving on to the nice-to-haves and non-essentials. Fixed expenses are easier to list since the cost is usually the same month-to-month. For variable expenses, you’ll need to do some math to find the average.
5. Adjust and update budget
The last step in creating a budget is to compare your net income to your monthly expenses and make necessary adjustments. If your expenses are higher than your income, look for categories you can cut expenses on. Consult your budget always before spending and reallocate funds if you under or overspend. Review your budget always to ensure you’re on track with your goals.
The best budget is the one that you’re able to stick to. It’s easier to budget if you visualize its long-term benefits. You can track your spending with budgeting apps or even with a simple spreadsheet. Whatever your financial goals may be, having and sticking to your budget will lead you to success.
Budgeting is not just for people who do not have enough money. It is for everyone who wants to ensure that their money is enough.
– Rosette Mugidde Wamambe