Whether you are money conscience or a frequent spender, it is important to create a financial budget. A budget allows you to allocate properly between bills, household expenses, and retirement savings. Creating a budget is time-consuming and requires attention to detail, but once in place, life much easier living on a structured financial plan. But how to create a budget? Here are a few simple steps to create a budget:
Before you can allocate your budget, you must know what your income is. This includes any regular monthly income, whether salary, financial support, or pension. One-time income, such as tax refunds, should not be included because it cannot be relied upon as steady revenue.
Outline your monthly expenses. These can be fixed (such as car loan or mortgage payment) or variable (utilities, groceries, etc.) but as long as you incur them monthly, they should be added to your list.
Subtract your total monthly expenses from your total monthly income. This leaves the extra money you have left every month after all bills are paid. Depending on the amount, you can divide the remaining budget between retirement savings, emergency savings, and spending money.
Now that your monthly income is allocated, you should use the next 2 to 3 months to test your budget in the real world. Did you under-allocate for variable expenses? Did you over-allocate for spending money? Could you spend more on savings and less on spending? Do you need more income to cover all expenses? These are all questions you should be able to answer when testing your budget plan.
Looking back at the previous 3 months, you should have sufficient information to adjust your budget. Re-allocate expenses and savings contributions as necessary, and maybe consider finding additional sources of steady monthly income. This can be a second job, or simply a money-generating hobby.
Now that you have a good understanding of your overall budget, focus on the best ways to save. When you understand your own budget clearly, it facilitates identifying your goals. A trusted financial professional can help you identify the resources in building your savings, whether for retirement or emergencies, and reach those goals.
Now that you have mastered how to create a budget and everything is planned and in place, you can sit back and focus on living life. Stick to your budget for at least a year and then look back at what you have saved, or where you could save more. Meet with your financial professional once again to ensure you are still on track to get the best out of your budget.