A budget is an estimate of revenue and expenses for a given future period that is usually compiled and re-evaluated on a regular basis. Budgets can be created for an individual, a group of individuals, a business, a government, or about anything else that generates and spends money. No one, whether government, business, or individual, has an unlimited amount of money to spend; therefore, the prudent way to spend is to “cut your coat according to your cloth.”
Even if you do not use a budget spreadsheet (such as an Excel sheet), you will require some method of determining where your money is going each month. Using a template to create a budget can help you feel more in control of your finances and allow you to save money for your goals. The trick is to find a method of tracking your finances that works for you. The steps below will show you how to make a personal budget.
Step 1: Work out your take-home salary
The first step in creating a budget is determining how much money you have coming in. You are not required to calculate your net income/salary if your employer pays after deducting government taxes and/or social security payments. However, if you are self-employed, you must deduct taxes and other expenses. Net income is your final take-home pay, and it is the figure you should use when creating a budget. If you work freelance or part-time in addition to your regular job, you must estimate your net income from these sources.
Step 2: Estimate your monthly expenses
Begin by making a list of all of your fixed expenses. These are regular monthly bills such as rent or mortgage (monthly repayments on a house loan), utilities (electricity bill, gas bill, etc.), or car payments (if taking car loan from a bank). It’s unlikely that you’ll be able to reduce these, but knowing how much of your monthly income they consume can be useful. Access your monthly grocery, travel, and entertainment expenses, school fees for school-aged children, and daily pocket money for children. Medical expenses such as medications and doctor/hospital fees are anticipated.
After you’ve accounted for all your variable expenses, such as groceries, gas, and entertainment. This is an area where you may be able to cut back on expenses. Keep grocery store receipts, utility bills, and so on to determine how to cut unnecessary expenses.
Step 3: Set your future financial objectives
Make a list of all the financial goals you want to achieve in the short and long term before you start sifting through the data you’ve collected. It would be difficult to achieve these goals if these expenses were not properly and prudently estimated.
Short-term goals
It should take no more than a year to complete, for example, the required money for a car loan down payment, recreation, and travel expenses. Calculate the expected costs of travel, hotel or inn rent, and daily meal expenses during a recreational trip.
Long-term goals
Saving for retirement, your child’s education, or a down payment for a mortgage, as well as regular monthly mortgage repayment, can take years. Remember that your goals do not have to be set in stone, but identifying your priorities before you begin budget planning will help. For example, if you know your short-term goal is to pay off credit card debt, it may be easier to cut spending.
Step 4: Planning for future expenses
Use the variable and fixed expenses you accumulated to help you forecast how much you’ll spend in the coming months. With your fixed expenses, you can reasonably predict how much you’ll need to budget for. When attempting to forecast your variable expenses, use your previous spending habits as a guide. You may choose to divide your expenses even further, dividing them into things you must have and things you want to have. For example, if you drive to work every day, gasoline is most likely a requirement. A monthly music subscription or other expenses, on the other hand, may be considered a want. When it comes to planning, this distinction becomes critical. Plan ahead of time for short-term holiday expenses such as Eid, Ramadan, Moharram, Christmas, and Diwali. Plan for long-term expenses as well.
Step 5: Adjust your habits if necessary
You’ll have everything you need to finish your budget once you’ve completed all of this. You’ll be able to see where you have money left over or where you can cut back so you can put it toward your goals once you’ve documented your income and spending. The first place to look for savings is in discretionary spending. Can you skip out on movie night in order to watch a movie at home? Try adjusting the numbers you’ve been tracking to see how much money you can save. If you’ve already reduced your spending on wants, consider reducing your spending on needs. You may require internet access at home, but do you require the fastest available? Finally, if the numbers still don’t add up, consider adjusting your fixed expenses. It will be much more difficult and require more discipline to do so, but on closer inspection, a “need” may simply be “hard to part with.” Such decisions involve significant trade-offs, so carefully consider your options. Small savings can add up to large sums of money, so don’t overlook the minor details. You might be surprised at how much money you can save by making small changes one at a time.
Step 6: Keep checking in
It is critical that you review your budget on a regular basis to ensure that you are on track. You should also check your monthly expenses on a regular basis and adjust any expenses that are unnecessary. You can also compare your monthly expenses to those of others in your situation or look for markets that offer a lower price for the same item (s). A few aspects of your budget are unchangeable: You might get a raise, your expenses might rise, or you might have reached your goal and want to set a new one. Whatever the reason, continue to monitor your budget by following the steps outlined above.
I hope this article has helped you understand how to make a personal budget.