Knowing how to create a budget is the most vital financial skill that will help you on your way to financial freedom. In my experience good money management always starts with a budget.
The idea of a monthly budget is to track your spending. Using a budget is the best way to get your financial house in order and find out where you money is going. The first time you sit down to run your budget numbers can be daunting and painful. If you’ve never written a monthly budget in your life this post will explain how to write one and hopefully help you stick to it.
Why Should You Learn How to Budget?
It will help discipline you to put your money in all the right places. A budget is designed as a plan for your income and outgoings and to make sure you live within your means. See it as a financial tool so you know where your money is going and then decide and workout where you really want it to go.
Tracking your money is the first step to taking control of it and working out a plan to deal with your debt, saving, investing and fun money. I think if you monitor your spending more closely you’d see spending patterns that could reduce your monthly expenses.
How I write mine will vary to yours. I can write my monthly budget in around 10 minutes or less thanks to practise. My budgets shows the intended budgeted amount and how much I spend each month in the actual column. Using the leftover column can show at a glance where the budget was on track and where my finances went overboard.
Your budget doesn’t need to a boring task and track every penny, it will give you an a rough idea of what you spent in each category. See it as a tool to help you see where your money goes so you can have better control over your money. Budgeting skills help avoid the temptation to go over budget and gives you a sense of accomplishment.
My budget has a Budgeted, Actual and a Leftover column. You don’t have to do it that way but the leftover column makes it easy to quickly see if the figures are over or under in each area. Budgets are personal thing so let’s get started and do what works for you.
I started my first budgets by writing them out on paper however I recommend using a spreadsheet program to do the calculations for you. You can design your own spreadsheet or use old fashion pen and paper. The important thing is to start tracking your money and keep your budget on the straight and narrow.
When you start budgeting you can take control of your money. This is my step by step guide to creating a budget that works for you:
Net Income (Take Home Pay)
How much money you end up with after the pension and taxes. This will be easy if you are on a fixed yearly salary for others who are paid overtime, commissions or who are self employed your monthly take home pay will vary and I recommend budgeting on the monthly average.
Note: If you not in your company’s pension scheme yet then investigate joining.
Fixed and Variable Expenses
Fixed expenses that you have to pay every month and usually don’t change. Put these in first. For example rent/mortgage, energy bills, water, council tax, insurance, Internet access.
Variable expenses that you have include food, clothes, petrol, entertainment, birthdays gifts/Christmas presents or any other odd expenses that crop up.
Debts
Next are any debt repayments excluding mortgage that you have to make on credit cards, loans or borrowed cash from other places. Add it to the budget and make sure you have a debt repayment plan you to get your debts to zero as soon as possible. If your total required budget is close or over your take home net income you need to find a way to lower your expenses or make more money or both.
Savings
When your budgeting is working you should have money left over to save and invest for the future. Set some saving and investing goals for your retirement, emergency fund, holidays and other things you want to save for. The percent of income you save on each saving goal up to you. I suggest saving at least 15% of income for your retirement.
Monthly budgeting tips:
Creating a budget doesn’t mean that all of your money troubles are cured. Once you have a budget consider it a work in progress that evolves with your finances. Budgets aren’t meant to be set in stone and never reviewed or looked at again.
Think of a budget as a monthly snapshot of income, spending, saving and investing and the leftovers are for enjoying yourself. Being on a budget doesn’t mean a life of not having fun, going out or been so strict with money it makes you unhappy. All it means it you know when to say “Yes” and when to say “No” because you have planned your money in advance. A budget should help set you free and help you live in harmony with your cash flow.
Of course if you are struggling with debt repayments then use your budget to help you tackle and clear that debt by:
- Workout the minimum you need to live off and use the rest for any debt repayment and saving.
- Investigate where you can cut back costs and save money so you can do the most with the money you have.
- You can live on a lot less and save a lot more if you increase your income. When you get that pay rise save the money or use it for debt.
- Lastly your budgeting will fail if you don’t do your best to stick to it and stop the random spending.
Learning how to budget can help you unearth and free up some spare money or reveal your money troubles. Budgeting may bring you discomfort, it may be shocking to see how much is lost and wasted on debts, silly spending sprees and expensive services. Yet do not despair you’ll find out where you cash is going.
Even “sad budgeting” will let you see the happy bigger picture and find out your true money facts. I have faith that you can do it and create a budgeting system that works for you.
Trust me that having a budget is the key to and the starting point for financial freedom. Keep your budget simple, updated and workable for you. You may not enjoy your budgeting right now but it will get better and be worth it in the end.
