Simply put, a budget allows you examine your total income, and expenses. However, we know that it is much more. We know that a budget is a financial plan that will allow us to start saving, pay off debt, and pay our everyday expenses. It is imperative to understand a few fundamentals about budgeting before we begin crafting our personal budget. Here are our key components for our expenses.
Fixed expenses - stay the same each billing cycle. Such as rent, insurance, debt, etc.
Flexible expenses - will differ each month. Such as groceries, utilities, etc.
Total expenses -are the combined amount of your fixed and flexible expenses.
Now we are ready to move onto assessing out financial situation and creating our monthly budget.
Its a smart move to evaluate our finances periodically if we are planning a major purchase, or if we expect a major change in income.
These four steps will help us achieve our monthly budget.
Finding our total income - We will need to find our total income in order to create our budget. This includes household income, pensions, bonuses, etc. Any take home pay you expect to get during a month will go here. An important tip is to make sure you use take home pay and not gross pay. If you don’t have taxes taken out we will simply just add those during our expenses.
Estimating our expenses. - Our expenses will never be as spot on as our total income due to our flexible expenses. The best way we have of doing this is getting your bank statements or checking all of our receipts. We simply see how much we spent on a certain item, decide if it is a fixed expense, or a flexible expense. If the flexible expense varies by a significant amount we will use its average over a 3 month period to determine its monthly cost.
Subtract our totals - We recommend that you use our free budget spreadsheet that you can download to the right. However, you are able to do this with pen and paper as well. Simply subtract our expenses from our income and what we have left is called our net balance. If we ended on a positive number we have some left over disposable income. Our disposable income is what we can spend on leisure actives or save for a rainy day. If we ended with more expenses than income, do not worry we will help you here. Check out our guide to getting your monthly budget back in the green.
Analyze our data - Once we create our first budget we can analyze our results over a period of a few months.. This is the most essential part of getting our finances under control. Here are a few questions we can ask about our month to month data.
Are we sticking to our monthly budget?
Do we need to allocate more funds to a certain expense, food, utilities, etc.
Can we use more towards our debt?
What can we do to increase our personal income?
Can we put money aside for our emergency fund?