Ways to Manage your Monthly Budget – Learn in 7 Simple Steps

Budgeting is one of the most important aspects of our lives. While the word “budget” is often associated with restricted spending, a budget does not have to be restrictive to be effective. Whether you’re creating a budget to get your finances in order, or working with a major accounting firm at a national or global scale, your budget can have implications on every action you take or decision you make. At the personal level, a monthly budget will keep you organized and focused on your personal financial goals. If you’ve never created or maintained a budget before, it might seem intimidating, but it doesn’t need to be.

A written, monthly budget is a financial planning tool that allows you to plan how much you will spend or save each month. It also allows you to track your spending habits. These steps will help get you started with a budget — and ultimately, get more organized. 

Determine your income

The first step is to determine your average monthly income 

to find out how much money you make each month, which is the amount of money you earn less taxes.

If you receive a regular pay check through your employer, regardless if you’re part-time or full-time, the amount listed is likely your net income. If your earnings aren’t always consistent — for example, if you are a freelancer, or if you work a different number of hours each week — average your income over the previous three months and use that as your baseline.

Create a list of your monthly fixed expenses

Next, you’ll want to put together a list of your monthly fixed expenses. It’s time to analyse your monthly fixed expenses. Begin by recognizing all of your fixed expenses — Fixed expenses are those regular expenditures that don’t change much from month to month. Some of these may include rent or mortgage; utility bills such as water, electricity, internet and cell phone; insurance premiums; transportation costs; trash pickup, and regular child care and debt payments like student loans or car loans.

List all of your variable expenses

Once you figure out your fixed expenses the next step is to list out all your variable expenses, which are the ones that fluctuate from month to month such as groceries, restaurants, shopping, fitness classes, and gifts. To estimate your variable expenses, check your receipts and online banking and credit card statements. The expenses that don’t happen every month like To make sure that these one-offs don’t catch you by surprise later, try estimating how much they cost you on an annual basis. Then divide by 12 so you can budget for them and put that money aside throughout the year.

Break your monthly income into categories

Now that you have your lists of fixed and variable expenses, sort everything into categories. It can be helpful to use both broad categories, like “food,” along with specific subcategories, like “restaurants,” “groceries,” and “coffee,”. Categorizing your expenses can help you determine what you are spending the most money on and where it might be easiest to save.

Credit card and bank statements are a good place to start since they often itemize or categorize your monthly expenditures.

Subtract your total expenses from your income to create a full budget

If you have more income leftover after listing your expenses, you can increase certain areas of your budget. If your income is higher than your expenses, you are off to a good start. This extra money means you can put funds towards areas of your budget, such as retirement savings or paying off debt. Ideally, you’d use this extra money to increase your savings, especially if you don’t have an emergency fund. But you could also use the money on non-essential things like dining out or traveling.

On the other hand, if you’re in a situation where expenses are higher than income, find areas in your variable expenses you can cut. Look for places you can reduce your spending—like eating out less—or eliminate a category—like cancelling your gym membership.

Create a budget plan

Identify your top priorities which will help you to analyse how you’ll use any extra funds in your budget after your necessary expenses. Depending on your timelines, decide whether it makes more sense for you to save vs. investment your money for each goal. 

You should review your variable expenses to find ways to cut unnecessary expenses by re valuating how much you spend on groceries, household goods, streaming subscriptions and other flexible costs. It’s a good idea to reduce these costs and regularly make adjustments to the amount of money you spend so you can avoid debt. Always keep one thing in your mind that even little-little savings can add up to a lot of money. You might be surprised at how much extra money you accumulate by making one minor adjustment at a time.

Review your budget regularly

After you finish creating a budget, the next step is to stick to it. It’s important to review regularly what you’re spending, to ensure that you are staying on track. You can hold yourself accountable in a variety of ways. For starters, you can set a maximum limit on the spending amount, and reminders with your credit card and bank accounts when you reach the maximum spending amount limit. You should also try tracking all of your expenses into your spreadsheet or any kind of budgeting app right after you make a purchase. And if you share expenses with someone else, make sure you’re both on the same page with the budget and keep each other on track.

Whatever the reason, get into the habit of regularly checking in with your budget by following the steps discussed above.

 

Lavanya Kanchanapalli
Lavanya Kanchanapalli

Partner at LiteFin

 

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