Creating a budget and staying on it can be difficult. But to keep control of your finances, a budget is necessary. You can also be sure your money is going towards those expenses that are important to you.
It sounds pretty simple, but some find it hard to understand the importance of budgeting in our lives. If we take it step by step, we will realize that budgeting is not that complicated.
Stage # 1: Compute your monthly income
The first step is simple. Take out your last paycheck to determine your monthly income when all taxes are deducted. The final amount will be what is deposited in your bank account every month.
In the case where you are self-employed or work on commission, consider the past 4 to 6 months to make an accurate estimate.
Stage # 2: Calculate all your fixed expenses
The next step towards making your budgeting plan is to jot down all of your non-negotiable expenses.
In the wise words of a financial expert and writer of Smart Moves to Grow Rich:
“Fixed expenses are those recurring costs that you must pay every month because they’re vital for your well-being or are commitments you’ve already made,” says Laura Adams.
Your fixed assets are your rent, car payments, and utilities. Make sure to take account of contributions for an emergency, as well as retirement fund under this segment. These are expenses that should be taken as an indispensable cost.
Stage # 3: Estimate your variable costs
Once you reach this stage, it is now time to plan your extra expenses. These expenses can include gym memberships, clothes shopping, money spent while going out, or on hair appointments.
Your variable expenses are all those costs that can vary every month or are flexible. The key is to precisely forecast your variable expenses by taking out your past spending records. In case if you were not keeping track, opt for downloading a budgeting app. Once you connect your bank accounts to your app, it will automatically categorize all your past expenses. You will have the entire month of spending information at your fingertips.
Now that we have sorted out how to gather the information of your variable expenses, you need to examine your habits. After doing so, you should create an expenditure guideline. Categorize those areas where you are draining the most amount and question yourself if you can reduce those expenses in your budget.
Stage # 4: Assess whatever is left
After you take away your monthly variable and fixed expenditures from your monthly income after-tax, the amount you have remaining is called your discretionary income. The formula will be:
Discretionary income = monthly income – expenses (including fixed and variable)
Those who are familiar with the concept of bookkeeping will have no trouble calculating their budgeting and their discretionary income.
This is your leftover money that ideally should be kept towards long-term plans, such as saving to purchase a property, or keeping some money away for retirement.
It should be your goal to increase your discretionary income as well as make savings of the highest importance over spending. Decide how much you would like to conserve each month and determine where you should cut back.
We all have many wants and needs. In this world, we are all rivals competing for limited resources. Therefore, we need to decide what is the best method we can implement to balance our current expenses and steady our savings needs. This way, we will never spend extra than what we make.
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