Managing your finances can prove to be more challenging than you anticipated if you do not have a proper understanding of where your hard-earned money goes. Even if you have sufficient income to meet all your expenses, there might still be times when you wonder where all your money went in a blink of an eye.
A monthly budget can help you avoid such situations because it serves as an ultimate guide to managing your earnings, expenses, debts, and savings. Moreover, it enables you to stay ahead of your spending.
If you have no prior knowledge or experience regarding finances, do not worry. We have a practical solution that all newcomers can follow to create a comprehensive monthly budget with ease and convenience.
The Ultimate Guide on How to Make a Monthly Budget
What Is a Monthly Budget?
A monthly budget simply means a plan or an estimate of how you intend to spend your monthly income. It is a self-explanatory record that highlights your monthly income, expenses, savings, and debts.
In other words, a budget helps you understand what you want to achieve financially. It prevents unplanned spending and puts financial discipline in your spending pattern. A sample monthly budget may consist of the following:
- Monthly salary or any other form of income
- House rent
- Electricity bill
- Grocery
- Conveyance allowance
- Insurance
- Debt installment
- Entertainment
- Shopping
- Emergency savings fund
- Investments
- Personal expenses
The objective of a monthly budget is not to restrict your spending. It aims to help you prioritize your expenses according to your financial status and the achievement of your financial goals.
Why Creating a Monthly Budget Is Worth Your Time?
Without a financial plan, it becomes impossible to keep track of your expenses. It can also be overwhelming when you realize how much you actually spend on a cup of coffee or other mindless activities. In such a case, a well-crafted monthly budget can become your best friend.
Here are some reasons why a budget is essential:
- Helps you stay ahead of your spending
- Makes you a mindful spender
- Guides you to save more money
- Helps you prepare for financial emergencies
- Prevents you from unnecessary expenses and debt accumulation
- Keeps you reminded of your financial goals
- Makes it easier for you to track your needs vs wants
A monthly budget can also help you stay calm and relaxed about your finances.
How to Make a Monthly Budget: Step-by-Step Guide?
- Calculate Your Monthly Income
The simplest method to create a monthly budget is to calculate your monthly income first. If you have a permanent or a stable source of income, then it will be easier for you to prepare an estimated record of your monthly earnings. Remember, you should consider your net income (the amount of money earned after deducting all applicable taxes) while creating a monthly budget.
On the other hand, if your income varies from month to month, then you should create a realistic estimate based on your average monthly earnings. For instance, your monthly income consists of:
- Salary
- Business income
- Professional earnings
- Part-time job
- House rent
- Interest from savings
List All Your Fixed Monthly Expenses
When we talk about the monthly budget, the first thing that comes to mind is monthly expenses. A monthly budget should ideally highlight your monthly expenses, which include both your fixed and variable expenses. Start with your monthly fixed expenses because they remain the same or vary slightly every month.
2. Some common examples of monthly fixed expenses are:
- House rent or home mortgage
- Insurance premium
- Loan installment
- School or college fees
- Internet subscription
- Mobile phone bill
- Monthly investment allowance
So, after calculating your monthly income, keep a track of all your monthly bills to determine how much percentage of your income is utilized in your monthly expenses.
- Keep a Track of Your Variable Expenses
Variable expenses are the ones that vary from time to time or from one month to another. It is always a good idea to keep a track of your variable expenses for at least a month to identify your monthly spending pattern.
Some common examples of variable expenses are:
- Grocery
- Petrol or gas
- Food restaurant
- Clothing or apparel
- Entertainment
- Online shopping
- Personal grooming items
- Travel expenses
- Gifts
- Recreational spending
In this step, instead of estimating your expenses, it is better to go through your bank account statements or digital wallet transactions and categorize them accordingly.
- Categorize Your Expenses Into Needs and Wants
One of the easiest but the most effective ways to create a monthly budget is to sort your expenses into needs vs wants.
Your needs mean the things that you cannot live without, whereas your wants are just luxuries that you can live without. For instance, your needs may include:
- House rent
- Grocery
- Electricity bill
- Conveyance allowance
- Healthcare bills
- Insurance
- Minimum debt payment
However, your wants may include dining out, latest gadgets and technology, entertainment subscriptions, etc.
- Set Your Monthly Savings Objectives
It is a myth that people with a good income do not save any money. The truth is that people with a high income can also save a significant amount of money if they have a proper budgeting plan. So, it is essential to set realistic monthly savings objectives.
To begin with, keep in mind that in a good monthly budget, at least 10% of your income should be allocated towards your savings. In most cases, people save money with specific purposes in mind, such as:
- Saving for an emergency fund
- Vacation or holiday savings
- Purchasing a new gadget or smartphone
- Investing in education
- Buying a house or a car
So, to begin with, decide on your monthly savings target because it will keep you motivated as you will feel that all your hard work is leading you towards the achievement of your financial goals.
- Set Aside Some Money for Your Emergency Fund
An emergency fund plays a critical role in every person’s financial journey. A sudden emergency, unplanned medical expenses, or car repaircan cause a sudden withdrawal of your hard-earned money at the wrong time
So, when creating your monthly budget, you should also keep in mind to set aside some money for your emergency fund.
To begin with, it is a good idea to save at least Rs. 500 from your monthly income as an emergency fund. However, once your emergency fund grows significantly, you should invest that in a separate bank account so that you cannot just keep touching the money in case of minor issues. In the long run, it is a good idea to save at least 6 months of living expenses as your emergency fund.
- Plan Your Monthly Debt Repayment Strategy
If you have any loans or credit card dues, then it is essential to highlight your monthly debt repayment plan in your monthly budget. To begin with, create a list of all your debts, along with their interest rates, outstanding amount, and minimum monthly payment.
In your monthly budget, always make sure that the money you keep aside for your debt comprises the minimum amount owed. Always pay off that minimum amount on time so that you do not have to pay any late fees. In addition, you can also pay an extra amount to pay off your debts faster.
When it comes to debt repayment, there are two popular methods: the debt avalanche and debt snowball method. The former focuses on paying off your high-interest debts first, whereas the latter focuses on paying off your small debts first.
- Choose the Most Suitable Budgeting Method
When it comes to budgeting, there is no right or wrong way to do it. The main objective is to make sure that you are able to track your expenses and have enough money to meet your financial obligations.
Some popular budgeting methods are:
- 50/30/20 Budget Method
- Zero-Based Budget
- Pay-Yourself-First Method
The 50/30/20 budget is a type of budget where you allocate 50% of your income to your needs, 30% to your wants, and 20% towards your savings and debt repayment. According to this budget, 50% of your income should be invested in your basic needs, such as house rent or mortgage, bills, groceries, and transportation.
While 30% can be spent on your wants, such as dining out, entertainment, and shopping, 20% of your income should be put into your savings or debt fund.
On the other hand, the zero-based budget is a type of budget where every single penny earned has a specific purpose. There should not exist any amount that has no allocation. For instance, your entire income should be allocated to house rent, bills, groceries, transportation, investment, savings, debt fund, and wants. In essence, your income minus your expenses should equal zero.
The pay-yourself-first method operates on a simple principle: put yourself first on your priority list. As the name implies, this method asks you to pay yourself first from your income and then utilize the remaining money to meet your other financial obligations. This method is perfect for everyone, especially those who find it difficult to save money at the end of the month.
- Use a Budgeting Tool
You do not have to choose a high-end software for your monthly budgeting needs. You can either use a simple notepad, excel sheet, google sheet, or a personal finance budgeting software
A budgeting tool simply means a system that can help you record your income, expenses, debts, and savings effortlessly.
A budgeting tool can be as simple as a handwritten expense tracker, or it can also include features, such as bill reminder, debt collector, expense categorizer, etc. The important aspect is having a well-defined system to record your expenses. For instance, you can have a simple excel sheet or notepad where you can write your income on one side and expenses on the other side along with the amount of money you have left at the end of the month.
- Evaluate Your Monthly Budget Every Week
Creating a budget only once can be damaging to your financial growth because you will have no idea about your spending pattern. So, it is important to evaluate your progress every week to see whether the estimated amount in your monthly budget is enough to cover your expenses.
In addition, it will help you avoid overspending in your expense categories
By evaluating your monthly budget every week, you will also have a clear understanding of how much money you spent in the past week and how much percentage of your estimated budget, you reached.
Some questions that you can ask yourself while evaluating your budget are as follows:
- On average, how much did I spend this week?
- Did I exceed or missed my weekly budget limit?
- Did I made any unplanned purchase?
- How much money am I left with?
- Did I reached my weekly savings target?
- Evaluation is the key to a successful monthly budget
- Example of a Simple Monthly Budget
- Suppose an individual has Rs. 50,000 as their monthly income after tax deduction.
This is just an illustration
To be completely honest, your monthly budget depends on a series of factors, such as your income, city of residence, family size, financial obligations, savings objectives, etc.
Common Budgeting Mistakes to Avoid
It is a common sight that most amateur budgeters set up a monthly budget and forget about it after a month or two. The truth is that the issue is not with budgeting per se, but it is with setting up a monthly budget in the first place. There are several things that you should keep in mind while creating a monthly budget.
Some common budgeting mistakes that you should avoid at all costs are as follows:
- Missing Out on Irregular or Annual Expenses
Most people forget to include irregular expenses in their monthly budget. Some irregular but essential expenses include annual insurance payments, festival expenses, and home maintenance costs. So, instead of skipping them, calculate your yearly expenses and allocate a small amount every month to cover those expenses.
- Creating an Unrealistic Budget Plan
Do not set unrealistic goals for your monthly budget. As much as it is important to stay within your means, it is also crucial to treat yourself once in a while.
- Not Tracking Your Weekly Expenses
Even if you have a proper monthly budget, do not ignore your weekly expenses. Small expenses can add up quickly. So, it is crucial to monitor those weekly expenses.
- Forgetting to Update Your Monthly Budget
Several external factors, such as income revision, new loan, home maintenance, travel expenses, or family expenses, can alter your monthly budget significantly. Therefore, it is essential to update your budget regularly.
- Not Saving Any Amount From Your Income
According to the pay-yourself-first budgeting technique, it is essential to save a certain amount from your income every month. For instance, if you make Rs. 50,000 a month, then you should put aside at least Rs. 5,000 for your emergency fund.
How to Stay on Track With Your Monthly Budget
A good monthly budget does not mean severe deprivation
It means smart spending and financial discipline. Here are some smart ways to stick to your monthly budget:
- Set up automatic payments to your savings or investment accounts
- Evaluate your weekly expenses
- Cancel subscriptions you rarely use
- Monitor your cell phone usage and other bills
- Compare prices before making any purchases
- Set a limit on your discretionary spending
- Keep some amount reserved for your emergency fund
- Do not make impulse buying
- Update your monthly budget in accordance with your latest income or spending pattern
- Celebrate the small victories
These practical money-saving tips will keep your expenses under control and help you meet your financial goals.
How Many Times Can I Make a Budget?
Ideally, a monthly budget should be created on a monthly basis, not quarterly or yearly. Why?
At the beginning of every month, you should estimate your income and expenses, and at the end of every month, you should compare your estimated income and expenses with your actual income and expenditure. In this way, a monthly budget gives you valuable information about your financial status for the next consecutive month.
For instance, if you have allocated Rs. 6,000 for your groceries in May, 2022, but you end up spending Rs. 8,000 in that month, then you will automatically have an estimate of how much you will spend on groceries in the coming month.
Final Thoughts
To conclude, learning how to make a monthly budget is one of the easiest but the most effective ways to understand your financial status. It is a vital tool to organize your finances and help you manage your finances better. We hope this ultimate guide helped you learned how to make a monthly budget step by step
Remember, a monthly budget is not a one-time activity. You will have to keep track of your monthly spending pattern and modify your monthly budget on a regular basis
We are optimistic that a monthly budget will help you accomplish several financial goals while keeping your expenses under control.
