How can I get started with a monthly budget?
Start by writing down your income from all sources. This is the money that is coming in every month.
Next, what are your fixed costs? These are things like rent or mortgage payments, car payments, student loan payments, etc. Next, what are you variable costs? Variable expenses change depending on your use of products or services, i.e. groceries, clothing, car maintenance/repair, etc. I would use an average figure here.
Take your total income figure less your total expense figure and this is your net income or loss for the month. If you have cash left over, then you can look for savings opportunities, like adding to your work 401k or establishing an emergency savings. If you have a loss for the month, then look at where that is coming from. This is why it is critical to list everything out, so you can go back and analyze what specifically is contributing to a deficit. Why are your expenses more than your income? Are there things you can cut down on? For example, can you cut back on cable or decrease the number of times you eat out a week?
There are free programs out there, such as Mint.com, https://www.mint.com/ , which will link to your bank accounts and credit cards and help you track your income, expenses and budget. It's very easy to set up and is a great tool to help you get started.
Sometimes a budget can be hard to follow, especially if it is prompted by a particular event, such as a move, a raise or a layoff. Or, as happened to me once-it was someone else's idea. First: words matter. I prefer the term spending plan, as I think when you tell yourself you are planning your spending, it implies more forethought and care for yourself.
The hardest part for people seems to be to record all income and spending. No, I am mistaken - the income part is usually easier than the spending. When recording income, include wage income, as well any other sources along the way (rental income, refunds, rebates, gift cards, checks from any side gigs etc.).
Now, you are ready to record your spending (as my colleague mentioned you can use online tools such as mint.com) or check with your bank or credit union-they may have a free online solution already integrated into your accounts.
What expenses are fixed? These may include rent/mortgage, insurance, tuition, commuting costs (tolls, parking, gas), groceries, utilities, loan payments (student loans, car payments, minimum on your credit card bills, if any), tax withholding, child care, pet care or babysitting costs, condo fees.
What expenses are variable? These may include eating out, any cell/internet/cable costs above the basics, paying extra on any loans or credit card bill, clothing, gifts, personal care, charitable contributions, and entertainment. Vacation spending?
Next, look at some ratios and categories in more depth:
- Are your residence costs less than 50% of your income (old guidelines were 33-35%)
- Of your food costs, how do the amounts play out between groceries, eating out and take out?
- What about the cable and cell phone bills, and other utilities?
- Savings? Hint: this percentage should not be zero and should be at least 5% of your gross income. 10-20% is better, but is out of reach for many people. You can plan to change that.
- Investing? (can include workplace retirement savings, or other regular investments)
- Are you paying for anything you are not using? Review those automatic debits!
Another filter to view spending through is Needs and Wants. One split I have recommended elsewhere on nerdwallet.com is 50% needs/ 30% wants, and 20% savings, as found in the book All Your Worth by Warren and Tyagi.
A spending plan only works if you use it, track the inflows and outflows, and monitor what is going on, in a periodic fashion.You can plan for how you adapt to changes in circumstances in advance. Will you spend by choice, or by chance?
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