Every year you tell yourself that you’re going to improve your finances. Then life gets in the way and you find yourself in debt – again. Not this time around. This is the year you’re going to create a monthly budget and stick to it.
Now that you’ve made this important financial decision, you’re probably wondering what to do next. Should you set up a money saving app? Should you start listing out your expenses? The answer is yes, and yes.
But, before you get overwhelmed with creating a monthly budget, it’s important to understand your cash flow – both in and out every month. From there, you can craft the perfect monthly budget.
Regardless of whether you use a budgeting app, like Mint or You Need a Budget, a spreadsheet, or even an old-fashioned notebook, here are some steps you can take when creating your monthly budget.
1. Figure out your income
Ok, if you get a paycheck, this seems pretty straightforward. But if you’re a freelancer or you have a side hustle in addition to your salaried job, you may have to sit down and take a good look at your bank account.
For starters, make sure you see exactly how much money is deposited into your account each month. Also, remember to factor in your take-home pay, after any taxes and other deductions. Then, to see your average monthly income, especially if it fluctuates, add up your income for the last 12 months and then divide that amount by 12. This will give you a workable income for your monthly budget.
Your monthly income is perhaps the most important step in building your budget. Why? Because you have to know how much money you actually have in order to figure out how much you can spend. For example, you can’t spend more than you earn – otherwise, you may find yourself in debt.
2. Figure out your expenses
Your monthly expenses include both fixed costs, as well as other fluctuating bills and expenses. Fixed expenses are bills that you generally pay every month in the same amount. Here are some of the common fixed expenses that you may have:
- Home mortgage or rent
- Car payments
- Personal loan payments
- Utilities
- Cable and Internet
- Cell phone
- Credit card payments
Variable expenses, on the other hand, are expenses that fluctuate in amounts or pop up infrequently. Some of these expenses might include:
- Food
- Entertainment
- Insurance (auto, medical, homeowners etc.)
- Medical bills
- Clothing
- Taxes
- Gas and other transportation costs
Once you have a handle on your expenses, you’ll be able to clearly see how much money you spend, compared to the amount you earn each month.
Pro tip: By subtracting your monthly expenses from your monthly income, you’ll see how much you have left (ideally more than zero and not in the negative category).
This leftover amount can then be earmarked toward your savings. If you do have a negative balance, this means you either need to cut back on your expenses or find a way to increase your earnings.
3. Set financial goals
With a clear understanding of your monthly income and expenses, you can now work on your financial goals and priorities. For example, do you have a long-term goal like saving for retirement? If so, how much can you set aside for this goal each month – based on your current budget?
If you want to save more than you currently have available, what steps can you take to either increase your income or curb your spending?
Or, here’s an example of a short-term goal: saving up for a summer vacation. Got your eye on a cruise to Mexico or a trip to Las Vegas? Figure out the total cost of that trip and how much you need to save to get there.
One financial goal that you might have, which could be holding you back and piling on stress, is to pay off your personal loans in Canada. Instead of letting your loan payments take over, take a step back and figure out a realistic plan for paying your loan off once and for all.
4. Save for your goals
This step goes hand-in-hand with #3. With both long-term and short-term goals, it’s time to commit to saving money every month.
This means you have to factor your savings goals into your monthly budget. You can start by saving any money you may have left over after paying your bills each month. And, if possible, try committing to saving at least ten percent of your income.
This is the amount that many financial experts recommend setting aside for your savings goals.
If you find it difficult to sock money away, you can try automating your savings. By automating, you can designate a percentage of your paycheck into your savings account every month. Most banks allow you to do this by setting up an auto transfer from your checking account to your savings account.
If you have a 9 to 5 job, you can also ask your employer or human resources department to do this for you by splitting up your direct deposit paycheck and putting a certain amount of it into your savings account – automatically each time you’re paid.
When you do this, you typically won’t miss the money and instead, you’ll be on your way to reaching your financial goals without having to think about it.
5. Determine if you can save even more money
Now that you’re on your way to making your personal budget work for you, you may want to start saving even more money. Excellent! The problem is: How can you do this once you are already saving all that you possibly can?
Where there’s a will, there’s a way. Many ways, actually. Here are three of our tried-and-true tips for saving more money:
Scrutinize your variable expenses and see if you can cut back. For example, can you host a girls night out at your house instead of the local bar? Can you ditch subscription services that you may not use all the time anyway? Can you make coffee at home instead of buying a daily latte?
Zero in on your fixed expenses and see if you can negotiate your bills or even switch providers. While there may be nothing you can do to lower your rent, perhaps you can switch cable providers and get a lower monthly rate. Or, maybe you can go with a new, lower-priced Internet company and free up cash that way.
Take on a side hustle to increase your earnings. This is a great way to save more money – and it’s fairly easy, too. If you don’t want to start your own business from scratch, perhaps you can work a few hours a week driving for Uber or Lyft. Got a spare room in your apartment? Maybe you can rent it out on Airbnb.
The key here is to look for money-making opportunities that will add more cash to your monthly budget and beef up your savings.
6. Choose a budgeting tool
With a commitment to saving money and creating the perfect monthly budget, it’s time to find a budgeting tool that will help you keep your finances organized.
For you, this may mean a spreadsheet, Google doc template, or a money saving app. Regardless of the tool you decide to use, make sure that it will indeed help you keep track of your money in a stress-free way.
In other words, if you love working with Excel spreadsheets, then why not stick with this method? On the other hand, if the thought of checking your account balances while in line at the grocery store makes your eyes light up, then maybe you should download one of these best budget apps.
Ready to create the perfect monthly budget?
When it comes to creating a monthly budget, there is no such thing as “one size fits all.” It’s up to you to crunch the numbers and figure out how much money you have to work with each month.
By following the six steps outlined here, however, you’ll start off on the right path to creating a monthly budget. From there, you can use a budgeting app or tool to help you stay on track, save money, and reach your financial goals.
Are you ready to create a monthly budget? Let’s do this!
