Are you constantly worrying about having enough money to pay your monthly bills? Perhaps you earn a decent salary, only to wonder where it all goes. Regardless of your situation, If you want to control your spending and work toward your financial goals, you need a budget. A personal budget is essential to developing the right spending habits, setting aside finances for long term goals, and ensuring the money in your bank account goes where it needs to.
If you are ready to get in control of your finances, you’ve come to the right place. Today, we look at everything you need to know as a beginner budgeter, so read on to find out more!
1. Determine Why You Need A Budget
The first question you need to ask yourself early on in the budgeting process is exactly why you think you need to set a budget. Everyone will have a different answer to this question, but common reasons include:
- Staying in track with long term financial goals
- To reduce overspending
- To reduce conflict between partners
- To break the cycle of living paycheck to paycheck
- To live within your means
- To get out of debt
Solidifying the reasons as to why you need to set a personal budget can really help you stay motivated and keep you on track with your spending.
2. Gather Your Documents
We spoke with a financial advisor in Gold Coast who shared that the most helpful thing you can do when preparing a personal budget is to gather all your financial documents and paperwork, including:
- Bank statements
- Credit card bills
- Investment accounts
- Utility bills
- Receipts/transactions from the last three months
- Mortgage or car loan statements
Gathering these documents is an easy way to give you access to any and all the information about your income and expenses. One of the keys to the budget-making process is to create a monthly average. The more information you are able to dig up, the better and you can also work out your tax commitments using a personal refund tax calculator .
3. Work Out Your Monthly Income
Of course, in order to set a monthly personal budget, you will need to work out exactly how much your monthly income is. If your income is in the form of a regular paycheck with automatic tax deductions, using your net income is fine. If you are self-employed or have other sources of income (cryptocurrency, centrelink, child support etc), be sure to include these as well. Record this total income as a monthly amount.
Top Tip: If you have a variable income each month, consider using the income from your lowest-earning month in the past year as your baseline income when creating your budget.
4. Figure Out Monthly Expenses
Once you have noted your income, you can start to create a list of outgoings. Write down a list of all the expenses you expect to have during a month. This list could include but is not limited to:
- Rent Expenses
- Home or Car Loan Payments
- Transport and Travel Costs
- Food and Groceries
- Personal Care
Tip: Determine your fixed and variable expenses. Fixed expenses are mandatory expenses such as rent payments, car payments and more. Variable expenses are expenses that change from month to month, such as food bills, personal care and entertainment. Start assigning a spending value to each category, beginning with fixed expenses. You can then estimate how much you will need to spend per month on variable expenses.
5. Do Some Basic Math
Now that you have your income and expense amounts, it’s time to do a little basic math. If your income is higher than your expenses, you are off to a good start. This extra money means you can put funds towards other areas of your budget, such as paying off debt or building your savings account.
On the other hand, if you are spending more than you earn, you may be on a slippery slope towards debt. It is important to note that finding yourself in this position is not the end of the world – it just means that you need to start making better financial decisions that keep you afloat.
6. Make Adjustments To Your Expenses
If you’ve found yourself in the latter of the two categories above, it’s time to really look at your expenses and figure out where you can make adjustments. Look for instances where you can reduce your spending, such as eating out less or cutting down on the number of streaming subscriptions you sign up to every month. Aim to have an equal amount of income and expense amounts to begin with. This equal balance means all of your income is accounted for and budgeted toward a specific expense or savings goal.
Note: If you are already earning more than you spend but are looking to set aside extra money at the end of every month, the above advice applies as well.
7. Putting Your Budget To Action
Now comes the fun part. You’ve figured the numbers out and it is time to put your budget to action.Recording what you spend throughout the month will keep you from overspending and help you identify problematic spending patterns or unnecessary expenses. Realistically, all it takes is a couple of minutes each day to record your expenses. Unfortunately, this is where many people fail.
Thankfully, there are now numerous apps dedicated to budgeting and finances. Our top pick is definitely MINT – a free budget tracker that helps you understand your spending for a brighter financial future.
8. Be Realistic
Last but not least, it is important to be realistic with your personal budget. If you are someone who has $5000 in expenses each month, don’t try to immediately cut that down to $1000 – also known as a definite recipe for disaster. Remember that your goal in using your budget should be to keep your expenses equal to or lower than your income for the month. As time goes on, you can always make adjustments or tweaks to your budget to suit your evolving priorities and needs. Your budget needs to work for you, not the other way around.
Setting a personal budget may seem like an incredibly intimidating task, but don’t let unnecessary fear deter you! Simply put, a budget is a detailed list of your income, what money is coming in and what is going out. It really is that straightforward!
We hope that this article has given you some valuable insight into how you can go about creating a personal budget that aligns with your long-term financial goals. All the best!