Having a budget is an essential part of being financially responsible. Yet creating a budget can be an intimidating prospect. Thankfully, plenty of experts are willing to share their advice on the matter.
The first step in this process is understanding what a monthly budget is. A monthly budget is how one plans for their spending in a given month. This includes recurring expenses (bills, loan payments, etc.) that can always be anticipated. It also takes income into account.
Understand Your Income
Before one can list out what bills need to be paid and in what order, it is critical to understand your monthly income. Look at your paychecks and calculate how much you earn on average each month.
This step is essential as a budget fails when spending more than they are making. As such, this is the basis of the budget. In other words, it is vital to get this number correct. Remember, when calculating income to use your net income. Net income refers to the money left after deductions (taxes, insurance, etc.).
Take the Time to Understand Your Finances
Most people want to dive right into creating a budget. The temptation there is understandable, as it can be frustrating waiting to start saving. However, it is helpful to take the time to understand your monthly finances before creating a plan.
It is beneficial to spend a month or two recording your financial habits. This should include everything from income to all spending. Some apps can make this process painless and are worth checking out.
One advantage to the slow and steady method of budget building is that it allows one to consider other recurring expenses. This is the sort of bill that comes up annually instead of monthly. Some examples include taxes, medical care, car repair, home expenses, and anything else that may crop up.
Prioritize
Now that you have a better idea of your financial situation, it is time to prioritize bills and other spending habits. Naturally, there will always be expenses that remain a priority. Rent/mortgage payments, food expenses, bills, and so forth. These should make the top of any budget list, as they cannot be cut.
The less essential items come next. Following a budget does not require a person to cut out all the things they enjoy spending money on. It asks people to prioritize their spending. So when looking at optional expenses, ask yourself what is most important and what can be comfortably cut out.