Have you ever wished that you had more money in your bank account? Well a personal spending budget is exactly what you need.
We all have at some point thought of having more money. Although, there is no magical way to get more money. There are ways to make it easier to money manage the money you have.
A personal spending budget helps you to manage your money coming in. And also how to effectively spend your money. It’s a tool that tracks your spending habits. This resource helps you plan whether to save or spend.
By creating a personal spending budget, you are saving your future self from the hassle of potentially going into debt.
Some people believe that that creating a personal spending budget kills spontaneity. This could not be farthest from the truth.
Remember the whole point of a personal spending budget is to know where your money is going and where it’s coming from. You can divide your money into both things you need and want.
There are many benefits of creating personal spending. Here is a compressive guide on how to make a personal spending budget.
Gather All Your Financial Documents
The first step in creating an epic financial plan is to gather your financial statements.
If you have a job where an employer pages you for your time, you should have paystubs. Grab your latest paystubs. If you don’t work the same amount of hours per week. You may want to grab a few of your latest paystubs to get your average monthly income.
Have more than one job? Then grab all your paystubs.
If you’re self-employed then determine what your monthly income is. For example, if you drive for Uber log into your account and find your earnings from last month.
If you work for yourself. Determine how much you make more months by reviewing your income statements.
Calculate Your Personal Monthly Income
After gathering all the financial documents that you need. It’s now time to determine your net income. This can be done by adding all our consistent income sources.
It is also important to know the difference between gross income and net income.
What is Gross Income
Gross income refers to how much money you earn from employers before considering all further deductions. For example, if your hourly pay is $20 per hour and you work 40 hours per week. Your weekly gross pay is $800 per week.
What is Net Income
Net income refers to your income after all further deductions have been made. Deductions can be social security, medicare taxes, and medical. Using the same example above. Though your gross pay is $800 per week. Your paycheck may only reflect a total pay of $700 in net income. Your paycheck was reduced by $100. $50 for social security, $25 for your medical plan, and $25 for medicare.
When calculating your monthly income. Remember that there are 52-weeks per year. Some individuals believe there are only 48 weeks in a year. The typical incorrect calculation is 12-months x 4 weeks equals 48 weeks. But, there are 52 weeks in a calendar year. Some months have 5 months. Ensure that your math is correct.
Your net income is what you will use throughout the personal spending budget. Knowing your net income will help you with all your personal finance concerns going forward.
Gather and Create a List of All your Monthly Expenses
Since you have finished listing and tracking all our monthly income sources. It’s now time to gather and create a list of all our monthly expenses, the same way you did with our income sources.
A good place to find out what your monthly expenses are is from your bank account statement. If you use a credit card, you can check your credit card statement.
But first, you need to know that there are two types of expenses, fixed expenses, and variable expenses.
Fixed personal expenses
Fixed expenses are the regular monthly bills. Examples of fixed expenses are rental lease payments, mortgage payments, HOA fees, cell phone bills, car payments, credit card payments, car, and medical insurance, and cell phone bills.
These are the expenses that rarely change from a month-to-month basis.
List all your fixed expenses. It is very unlikely that you will cut back on these expenses since they are usually required to be paid in full.
Variable personal expenses
Variable expenses are the ones that may change monthly. Examples of variable expenses are groceries, gas, car maintenance, electricity, gas, water, entertainment, traveling, and dining out.
List all your variable expenses. These are expenses that you can 100% can cut back on since these are not usually “required” expenses and don’t need to be paid in full.
If you are having a difficult time tracking and gathering where your money is going. Consider dedicating a few months to tracking your daily spending. This can be done through pen and paper or a cell phone application.
Determine Your Disposable Income
Last you need to calculate what your disposable income.
Disposable income is how much money you have left over after paying for all your expenses.
This is calculated by subtracting our Net Income from your Total Monthly Expenses
(Net Income – Total Monthly Expenses = Disposable Income.)
Adjust Your Incomes, Expenses, and Priorities
Since you calculated our income and expenses. You can now adjust your plan.
If you think you are spending too much on certain things, such as entertainment. Consider cutting back on it.
Always consider where you can cut back, and where you are spending too much.
This is also where you can start allocating money to different priorities you might have.
It is also useful to have a category for “blow money”.
Blow money refers to money that you can spend guilt-free, however, this is a personal choice. Blow money is for gambling, lottery, or impulse buys.
Once you complete your financial plan, you need to review it regularly. It is important to realize that this is not a one-time thing. You need to constantly compare your monthly expenses and monthly incomes. It’s recommended that you review your financial plan every three months at a minimum.
Avoid the problems with your personal spending budget
Always be on top of your financials to prevent future headaches from coming.