Budget is a vital finance tool that helps people to track and understand their spending. It helps them know where their money is going and what their financial position is. This particular information is crucial for them to keep their spending under control and hence saving money for other needs, either long-term or short-term.
So, for one to reach his or her set financial goals, there is the need to first create a personal budget. Below is how to set your monthly budget to control spending:
1. Ensure that you know your monthly income
This is the very first step in making a budgeting. Whether you are a working or a self-employed individual, you need to first know your monthly income. To know your expenditure, you need to be aware of how much money you are making each month. Combine all your income sources at one place and add up. Also, include all the other income sources including your spouse’s salary if you are married, interest earned from your savings account and rents.
2. Make a list of expenses
After knowing your monthly income, ensure that you track all expenses and put them down. This can be simply done by tracking every expense you make. Divide all expenses into categories, to easily determine where you are spending the most.
3. Prioritize your spending
After tracking all the expenses, you need to prioritize them as discretionary and necessary expenses.
• Discretionary expenses: If you make any expense based on your wants rather than needs, then this type of expense is called a discretionary expense. These expenses aren’t necessary for the survival of an individual. For instance, the money you spend on eating out, vacations, cosmetics, luxury clothing, birthday gifts, etc. The discretionary expenses are majorly for recreational and entertainment purposes.
• Necessary expenses: They are generally made depending on the basic needs and requirements and are also called living expenses. For instance, money that one spends on utilities, groceries, insurance, transportation, medicines, debt payments, etc.
This particular step is crucial due to the fact that it lets one understand his or her spending behavior – regardless of whether you make the necessary expenses or the unnecessary expenses. Ensure that you reduce the unnecessary expenses to help you save some money for emergency needs.
4. Calculate surplus or deficit
Add up all expenses that are categorized under living expense and all the expenses that are categorized under discretionary expense category. Then subtract these two kinds of expenses from your monthly income.
If the amount you get is a negative value, it means that you are in deficit and if the amount is a positive value, it means that you have generated some surplus, which can be used for savings.
In conclusion, creating your own budget according to your needs and requirements is better than downloading the budgeting software. One can simply use a spreadsheet to create one. Living without an income-expenditure budget is similar to driving a car towards an unknown destination. Making a budget will assist you in attaining financial stability. So, create one today and stick to it.
2018 ·