Developing a monthly budget can help you get out of debt and build wealth. However, developing a budget is much easier than following it. If you want to get the maximum benefit from a budget, you'll have to practice some restraint and self-discipline to follow it.
EditSteps
EditBudgeting Help
EditFiguring Out What You Have
- Calculate your monthly income. As a rule of thumb, it's best to budget by the month.[1] So, you'll need to determine your monthly income. Remember to look at your take-home income, that is, what you get if/after taxes have been taken out.
- If you work hourly, multiply your hourly wage by the number of hours you work per week. If your schedule varies, use the minimum number of hours you work per week instead of the maximum. Multiply your approximate weekly wage by four to come up with an approximate monthly wage.
- If you work salary, divide your yearly net salary by 12 to determine approximately how much money you make per month.
- If you get paid biweekly, base the monthly budget off of 2 paychecks, because that's all the money that will usually come in per month. This is especially helpful if your budget is tight, then twice a year you'll get bonus paychecks to put towards savings.
- If you work odd jobs and have an irregular income, average out the last 6 to 12 months of recurring income. Use this average to build a monthly budget, or choose the lowest monthly amount to provide yourself with a worst case scenario.
- For example, if your monthly salary is $3,800 then that's your core income.
- Factor in other sources of income. Other income includes any money you receive regularly that you do not work for, such as alimony.
- For example, if you earn $200 per month for work that you do apart from your job, then your total income is $3,800 + $200 or $4,000.
- Skip bonuses, overtime, and non-recurring income. If you cannot rely on receiving the money during any given month, do not factor it into your monthly budget.
- The good news is that, if you do receive that additional income, it will be "gravy." That is, it will be money that you can spend (or, better yet, save) that you hadn't accounted for.
EditDetermining Your Expenses
- Calculate your total monthly debt payments. One of the keys to successful budgeting is to properly track your expenses.[2] That includes debt payments as well as other expenses. Find out how much you owe per month on car loans, mortgage, rent, credit cards, student loans, and any other form of debt. Mark down each figure separately, but also total the figures together to determine how much you owe.
- For example, your monthly debt payoff might include the following: a $300 car payment, a $700 mortgage, and $200 in credit card payments. That's a total of $1,200 in monthly expenses.
- Keep track of your monthly insurance payments. These payments typically include whatever you spend each month on renter's, homeowner's, car, other motor vehicle, health, and life insurance.
- For example, your monthly insurance expenses might include the following: $100 for car insurance and $200 for health insurance. That's a total of $300 in monthly insurance expenses.
- Average your monthly utilities. Utilities include any monthly service you pay someone else to provide, and usually cover bills for water, electric, gas, phone, Internet service, cable, and satellite. Gather your receipts and past bills from the last year to come up with an average monthly estimate for each utility, and add the averages together.
- For example, your monthly utility expenses might include: $100 for water and $200 for electricity. That's a total of $300 in monthly utility expenses.
- Determine your average monthly grocery bill. Look over your grocery receipts from the past few months to determine how much you typically spend each month.
- For example, your average monthly grocery expenses might be $1,000.
- Look at your past cash withdrawals. Dig into ATM receipts and bank statements to determine how much you typically withdraw each month. Of this, determine how much was spent on necessity versus want.
- If you kept all your receipts from the past month, look through them and calculate how much you spent on things you needed—gasoline, food, and so on. Subtract this amount from your total monthly cash withdrawal to determine how much you spent on things you merely wanted—a new video game, a name brand bag, and so on.
- If you did not keep your receipts, do your best to provide an estimate based on memory.
- For example, if you withdraw $500 per month at an ATM, and you spend $100 of it on groceries, then you'd subtract that $100 from the $500 total because you've already accounted for your grocery expense. That brings your net ATM withdrawals to $400 per month.
- Figure in special expenses. Special expenses do not recur every month, but they do recur often enough for you to anticipate them coming. Examples include holiday gifts, birthday gifts, vacations, and repairs or replacements you anticipate paying for in the near future. Determine how many special expenses you plan on encountering for each month, from January right through December.
- For example, you might anticipate $100 per month in car maintenance.
EditMapping It Out
- Decide how you want to keep track of your budget. You can use pencil and paper, standard spreadsheet software, or specialized budget software. Software may make it easier to calculate and alter as necessary, but you may also find it convenient to write your budget out and keep it by your checkbook or credit card to serve as a constant reminder.
- One of the best things about using software, such as a spreadsheet, to map out your budget is that you can play "what if." In other words, you can see what would happen to your budget if your monthly mortgage increased $50 per month by just plugging the new number into your "Mortgage" value. The software should tally everything up immediately and give you an idea of how much of a dent that increase would put in your discretionary spending.
- Bank of America offers a spreadsheet template that you can download for free.[3]
- Organize your budget. Separate your budget into two basic sections: income and expenses. Fill in each section with the information as you calculated it above, marking down a separate entry for each individual source of income as well as each expense.
- Calculate two totals for the "income" section. For the first, add together all the new income you bring in each month. For the second, add everything together, including the money you have saved in accounts.
- Calculate three totals for the "expenses" section. For the first, add together your fixed expenses, including debt payments. For the second, add together payments that vary from month to month. For the third, calculate your total expenses.
- Subtract your total expenses from your new income. In order to save money, you must have a positive difference. In order to break even, the two totals must balance each other out.
- For example, if your total expenses are $3,300 per month and your monthly income is $4,000 per month, then the difference is $4,000 - $3,300 or $700 per month.
- Make alterations. If you subtract your total expenses from your new income and come up with a negative difference, go into your alterable expenses and make adjustments. Non-necessities, such as games and clothes, are the easiest amounts to subtract from. Keep altering until you come up with an amount that allows you to either break even or save money.
- Ideally, your income should exceed your expenses and not just break even. There will always be expenses that you didn't account for. That's just an immutable law of the universe.
- Never allow your total expenses to exceed your total income. Occasionally exceeding your new income only means that your savings will dwindle, and you can do so from time to time if needed, even though you should not make a monthly habit of it. Your total income, however, also includes your savings, so if you exceed it, you will go into debt.
- Keep a hard copy of your budget. Place it near your checkbook or in a special file folder kept for budgeting purposes. An electronic copy is good to have, as well, but a hard copy will remain even if something nefarious happens to your computer and erases the file.
EditVideo
EditTips
- Be realistic. Making alterations is an important part of budgeting, but you can only expect to alter so much. Even if you plan on only spending money on the absolute bare necessities, the prices for many of these necessities—such as gas and food—fluctuate in ways that you may not be able to anticipate while preparing your budget.
- It's better to overestimate expenses and underestimate income. People tend to do the opposite out of optimism.
- While you keep track of your budget through the months, you should review and revise your budget occasionally. Diligently track income and expenses for at least 30-60 days (longer if income or expense have large variances from month to month) so you can see any changes and make adjustments accurately.
- Dave Ramsey recommends creating a budget using the envelope system. That's when you create an envelope for each monthly expense item and put the budgeted money for that item in the envelope at the beginning of the month. Then, when you spend money for a particular expense, you pull it out of the envelope. If the envelope is already "dry," then you're done spending money on that item for the month.[4]
EditWarnings
- Do not allow yourself to dig into your savings too often. Doing so every once in a while is acceptable and bound to happen, especially as emergencies and unforeseen expenses come up. If you plan on doing so too often, however, your savings will dwindle rather quickly.
EditThings You'll Need
- Pencil
- Paper ledger
- Spreadsheet software
- Budgeting software
- Receipts and other past financial statements
EditSources and Citations
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