Better Budgeting in 3 Steps
Whichever method or tools you use, the three steps to develop a monthly budget are always the same.
Step 1 - Determine Monthly Income. Your first budgeting step is to determine your monthly income. When they think about income, most people think of what they earn from their job. However, it is important to include all sources of income. For example, if you earn regular money babysitting for a relative or receive child support, it should all be included in your budget. Use net income, which is the amount of money you receive after taxes and other deductions (health and life insurance, 401k contributions, etc.) After you become comfortable managing your money on a monthly basis, you may want to consider a six-month plan and, eventually, work up to a yearly budget.
Step 2 - Identify High-Priority Bills. Your next budgeting step is to determine your high-priority bills. Examples include a mortgage or rent payment, basic utilities, auto payment, and insurance premiums. These payments are generally fixed, and you are expected to pay them every month. Some bills, such as insurance, are paid periodically. For this type of bill, budget by dividing the amount of the expense over the appropriate number of months (i.e. a quarterly payment would be divided over 3 months).
Step 3 - Estimate Other Expenses. After subtracting the priority bills from your net income, you will ideally still have money left for other important items, such as groceries, gasoline, and credit cards. The first time you set up a budget, it may be hard to determine how much you will spend on groceries or gas. So the next step is to try your best to estimate these amounts, and track your expenditures to monitor the accuracy of your estimates. Comparing your estimiates to how much you actually spend will help you adjust your budgeting amounts for the next month.
A word of warning: Most people are surprised at the amount of money they spend on trivial or unnecessary items. It’s important to set aside funds to cover the high priority bills first. Try to allocate a reasonable amount of money for miscellaneous expenditures, such as dining out and entertainment. For example, if you’ve been spending $100 per month on dining out, consider allowing only $50 in your budget. Then, after spending your allocated amount, don’t spend any more in that expense category. It takes discipline, but is well worth it. The money you save can go toward building up your emergency savings account, paying down your debts, saving for retirement, or maybe even paying for a vacation.
It may be difficult at first, but most changes are not easy. You’re changing your mindset and attitude toward money, and that takes time. But the longer you do it, the easier it becomes. It won’t be too long before your budget becomes a habit.
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