Looking for the perfect time of year to start a monthly budget? Because of the demand it places on your finances, the holidays are a good time to start thinking about ways to better manage your money in the new year.
Sitting down and creating a budget has a number of benefits. It allows you to plan out your finances, earmark funds for specific uses, and helps you to prepare for the unexpected. The more time and attention you spend with the budgeting process, the greater the financial rewards will be in the future. Here are some budgeting steps you can start developing now to strengthen your finances in 2018.
Determine and factor in all sources of income
The first step to determining your monthly budget is to figure out exactly how much money you generate every month. Calculate the after-tax income from all of your reliable sources: work, rental property, Social Security, pensions and taxable investments. If you have irregular sources of income, it is best to determine a monthly, after-tax average from the last six or 12 months. And, don’t include bonuses or overtime as these aren’t regular, reliable sources of income.
Calculate your debts and ongoing expenses
Debt and monthly expenses can cover a wide range of items, and are as important as income when developing your budget. When calculating these expenditures, include car loans, mortgage, rent, student loans, utilities, insurance payments, and credit cards – anything that you have to pay every month. Credit cards can be a little trickier since the amounts vary from month to month. As with irregular sources of income, calculate your average credit card debt for the last 12 months.
Plan for the essentials
It may be hard to believe, but many of us spend more money on items such as food and gasoline than we do on other bills every month. When planning your budget, it’s important to factor these expenses in as well. Be sure to keep your receipts from trips to the gas station and grocery store, and at the end of the month total these up. This will give you an accurate picture of your monthly spend on these items, and will allow you to plan accordingly when budgeting.
Build an emergency fund
Life doesn’t run in a straight line. There are ups and downs, twists and turns. Some of these can be anticipated, some can’t. You must set aside money for holiday gifts, vacations and car maintenance. For other things, like a major car repair, your emergency fund may be the solution. Some experts recommend a minimum emergency fund of two weeks’ pay or $1,000, whichever is greater. Others say to save much more and to be prepared for loss of income for several months. In either case, it is important to budget a certain percentage of your monthly income to save for emergencies.
Set long-term goals
When you are planning your budget, it is important to keep your long-term goals in mind. If you can completely pay all your debts and expenses each month with just your income – and still have some money left over – you can set aside funds to put into savings or investments to help you grow your money. Or, they can simply be placed in a rainy day fund for emergencies. Either way, your time spent budgeting will be well worth the investment. You will be managing your finances and not living paycheck to paycheck.
Organize your budget
Now that you have your numbers for your assets, income, debt and expenses, you can create a spreadsheet – whether it’s paper or electronic – so you can see how everything works out. Budgeting is best done on a monthly basis, as this allows you to fully understand where your money goes each month and devise strategies to help you save, or plan for specific events such as vacations.
A simple way to organize your budget is to start with all of your monthly income, then deduct all of your expenses, including your mortgage, utilities, car payments, credit cards, etc. From there, you can plan out how much money you will use for food, gas and other essentials; how much will be disposable income; and how much you will put into savings.
The last step
Managing your money is an ongoing process. It doesn’t stop once you make that first budget, and will evolve over time as changes occur in your life. Actions such as having a child, buying a car, purchasing a house or planning for college can affect your monthly expenses. However, by taking the time to plan ahead, a monthly budget could help put you in the driver’s seat with your finances for many years to come.
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