A personal budget is a financial planning tool that allows you to plan how your money will be spent over a week, month, etc. It helps you better understand where your money goes each month, how to save money, and where it is possible to cut back to save money and achieve other financial goals.
By creating a budget, you can make sure that you have money at the end of each month to save. No matter what your financial situation is, a budget can help. Yet, according to a poll, only 32 percent of Americans have a monthly budget.
The best way to take control of your income and expenses is to create a budget. This simple tool shows you if you are spending more or less money than you bring home. In addition, a budget helps you understand the money going in and out of your household each month.
Now is the perfect time to create a monthly budget for the new year to take control of your finances and achieve your money goals. If you are new to budgeting, this article will provide additional options detailed for creating a budget for the new year.
What Is A Budget And Why Do You Need It?
A budget is a spending plan that allows you to make spending decisions within your means for a particular period of time. A budget estimates how much money will come in during a particular period and how much will be spent to cover expenditures such as food, mortgage or rent, loan payments, minimum payments, utilities, and regular savings (putting money aside is an expense, too), etc., during that time.
A budget will allow you to make spending decisions based on what you have, avoid getting into debt, and reach your financial goals. It can help you get out of credit card debt, save for a specific goal like buying a house, pay down debt fast, or build an emergency fund.
Creating a budget can help you save for your short- and long-term financial goals and identify areas of your expenses that you cut back on or cut out entirely temporarily so you can save more money and not overspend. Even if you are living within your means, by making a budget, you can save more money that can be put toward your future goals.
A budget makes it easier to manage your finances and ensure you do not get into debt, as it will show you a clear and straightforward way to spend less money every month, leaving you in a better financial position.
Steps To Creating A Budget For The New Year
Here is how you create a budget for the new year to take control of your finances:
1. Set Your Money Goals
First, determine why you want a budget. When you get ready to budget, set your goals. Remember to be honest and realistic when it comes to setting your financial goals. It is easy to reach your budgeting goals if your budget only includes money you realistically expect to receive.
Short-term goals can include building an emergency fund, getting out of debt, etc.; mid-term goals can consist of saving for a wedding, and long-term goals can include saving for retirement.
Do not create a budget based on unforeseen windfalls like winning a lottery.
2. Gather All Your Financial Information
To create a successful budget, you must gather all your financial information regarding sources of your actual income and expenses for at least the last month. Gather all financial statements like bank statements, credit card statements, utility bills, receipts, etc.
Suppose you cannot gather all your financial information regarding your current spending habits. In that case, you will need to figure out how much you need to spend over the course of a month, including variable expenses, which may change from month to month, such as groceries, entertainment, and gas.
Once you create a simple budget for the first time, you will have all the information regarding sources of all your monthly expenses on hand at the end of the month to create a budget for the coming months.
Now that you have the documents that show your monthly income and expenses, it is time to set up a monthly budget. But first, you must choose a method or tool to create a budget.
Before you write your budget, make sure you have everything you need. You will need all the documents that show your income and expenses.
3. Choose Your Budgeting Tools
When you have gathered everything regarding your financial information, you will need a budgeting tool to determine exactly how much you earn and spend each month and set up your budget overview.
You can calculate your income and expenses each month and set up your budget with a sheet of paper and pen, using a computer program like Excel spreadsheet, budgeting apps like Mint, or budgeting, software like You Need a Budget (YNAB) and QuickBooks Online which creates budget accounts lists directly from your chart of accounts.
These tools are beneficial for tracking your monthly spending to see whether you are sticking to your budget.
4. Calculate Your Income
To create a budget, first, you should calculate your net monthly income. It is easy to determine your monthly income if you get paid the same amount each month. For example, suppose you get paid the same amount weekly or bi-weekly; multiply the money coming in weekly or bi-weekly by 52 or 26, and then divide this number by 12 to get your monthly income.
However, if your earnings vary each pay period, you must make necessary changes to the income column on your budget.
If you have other sources of income like rental income, extra income from a side hustle, or investments, be sure to include those as well. Then, you need to determine your total net monthly income using all sources of revenue.
5. Work Out Your Expenses
Once you have figured out how much money is coming into your household each month, you need to work out how much you spend each month. Since you have not budgeted before, you can find out exactly how much you are spending each month by checking your bank statements, receipts, and financial files.
You need to add up multiple months of transactions and monthly expenses to determine the exact amounts you spend each month. So, make a list of every single expense.
If there are items you pay only once a year, such as house insurance, car insurance, and property taxes, be sure your budget includes these expenses. See how much money you spent the previous year on these expenses. Then divide that amount by 12 to get the amount you need to set aside each month so you can pay the annual bill.
Make sure to allocate the monthly amount for these expenses to your budget amounts. You can move the money for each of these expenses monthly into a savings account or keep it in an envelope or jar.
Decide how much you need to allocate to your financial goals. Create an expense line for each financial goal and decide how much you need to devote to each goal. For instance, you can create a category for savings to build an emergency fund. Then, you must put aside the amount you have decided on every month for this category to build an emergency fund.
How much you need to allocate to each goal depends on each goal. The shortcut way to do this is to allocate at least 20% of your income to your savings expense category and then allocate a specific amount from it to each financial goal.
Allocate an amount for every expense in the expenses category. For example, you might allocate $800 to rent, $300 to food shopping, $80 to clothes, and $150 to eating out based on your past spending habits.
You then add these expenses together to determine your monthly household expenses.
6. Figure Out Your Totals
Once you have listed all your monthly expenses, add your expenditures and subtract this amount from your monthly net income. If your costs exceed your income, you have a negative balance or budget shortfall.
You spend more money than you earn if you have a negative balance or total. Or in other words, you are living beyond your means and need to cut back on unnecessary spending. In that case, you will have to adjust your budget so that you do not spend more than what you earn.
You will have to find out how to reduce some of your expected expenses for the budgeting period unless you can find ways to make extra money so that your expenses match your income. Once you have worked out how much you can reduce your spending, try your budget again and see where you stand.
If your income is more than what you are spending per month, you earn more than you spend or have a surplus. Congratulations! You can put the extra money into your savings account or emergency fund towards debt repayments or invest your extra money, depending on your financial goals.
If you have a surplus, it is still worth looking to see if you could save more money by spending less on non-essentials or temporarily cutting out some excess spending or expenses.
7. Cut Spending
As discussed above, if you have a negative balance, you will need to find out how you can cut your discretionary spending for the budgeting period so that your expenses do not exceed your income.
When cutting spending, look closely at your variable expenses category on the budgeting balance sheet to see where you can cut back. For example, can you pack a lunch instead of eating out? What about making coffee at home? Cancel subscriptions like your gym membership, and downgrade your TV package to cut the gaps between income and expenses in your budget worksheet or if you need to save more money.
You can cut food and grocery bills to reduce your monthly expenses. Always plan meals and create a meal plan before you head to the grocery store. When shopping online or in-store, take advantage of discount codes and coupons. You do not have to cut the fun out of your life in order to save money. Why not watch a movie at home instead of going to the theater?
Shop around for your auto insurance policy to see if you can get a lower rate to save money. In addition, you could spend less on things like gas and electricity by switching to cheaper suppliers.
If you smoke and/or drink alcohol, you could save a lot of money every month by quitting smoking and/or drinking alcohol. Identify areas in your expense category to cut back on without impacting too much on your lifestyle.
There are many more ways to cut spending if you need to balance your budget or save more money to put toward your financial goals.
8. Keep Track Of Your Spending
Once you have set up your budget, track your spending regularly to ensure you are not overspending. By tracking your spending, you can find out if you are overspending in a certain category or if you have some amounts left over in another category or more. If so, you can adjust or revise your budget at the end of the month for next month. Use one of the budgeting tools mentioned above to track your expenses.
You may make mistakes in the first few months, but after the first month, you should be able to predict and tweak your expenses for next month’s budget. Just stick with your budget each month, and you will get the hang of it. In no time, you will be budgeting with ease and controlling your money.
9. Review Your Budget
Now that you have created your monthly household budget, you will need to review it regularly to ensure your budget process is working. For example, your income may go up and down, expenses may go up and down, financial goals may change, or you may have to deal with financial emergencies that could crop up unexpectedly.
If any of these occur, you will need to adjust your budget because all these things will impact your annual budget. For example, if you have finally paid off your credit card debt, you need to decide where that money needs to go now. So, your budget should be re-evaluated and adjusted as needed.
Creating a household budget for the new year is a great way to take control of your finances. By creating a budget, you can spend money based on what you have coming in each month and set aside money for the future to reach your money goals.
Once you have set up your budget, track your spending regularly to make sure that you are not overspending, and adjust or revise your budget at the end of the month for the next month.