Spending Budgets
If you are trying to manage your finances better, a spending budget is just what you need. A budget is a plan that helps you determine where to put your money each month, and it ensures you don’t run out of money before your next paycheck. [1]
To start, you should determine your net income by subtracting any taxes or deductions from your gross income to get an accurate picture of your take-home pay.
List all expenses, including fixed costs like rent or mortgage, utilities, and debt payments, as well as variable expenses such as:
- Entertainment
- Groceries
- Transportation
Once you have a clear understanding of your income and expenses, you should prioritize your expenses based on necessities and allocate a specific amount of money to each category.
This will help you stay within budget and ensure you have enough funds for essential expenses. Setting spending limits for each category will also help you avoid overspending and keep track of your financial goals.
The process involves assessing your financial situation and goals, determining your monthly income, and analyzing expenses, finishing off with reviewing bank and credit card statements.
1. Assessing Your Financial Situation
This provides a clearer picture of where you currently stand and what steps you need to take to achieve your desired financial outcomes by understanding your current:
- Assets
- Debts
- Expenses
- Financial Goals
- Income
Gathering and analyzing all your relevant financial information to identify any gaps or areas of improvement, this process aims to develop a personalized roadmap for your financial success.
2. Evaluating Your Financial Goals
Your financial goals align with your spending history and priorities in a way that reflects a desire for both short-term and long-term financial security. Your spending history shows a consistent focus on essentials such as housing, utilities, and groceries, indicating a solid understanding of your basic needs. This aligns with your priority of ensuring financial stability and comfort for yourself and your family.
At the same time, your budgeting decisions are geared towards achieving both short-term goals, such as building your emergency fund and saving for a family vacation, as well as long-term goals, such as saving for retirement and your children’s education. By prioritizing these savings goals, you’re taking proactive steps to secure your financial future.
Adjusting your spending habits can further increase savings and potentially allow for more discretionary spending on fulfilling hobbies or activities. By carefully evaluating your spending habits and making adjustments where necessary, you can free up additional funds to allocate towards your financial goals, leading to increased financial security and the ability to enjoy life to the fullest.
3. Determining Your Monthly Income
Your sources of income may include salary or wages, rental income, investment dividends, freelance or consulting fees, and any other forms of earned or passive income. To calculate the total monthly income, you would add up the amounts from each income source. Use a conservative estimate, taking into account the lowest month’s income or an average over the past six to 12 months if income varies.
If you’re self-employed, you must deduct estimated taxes and other business expenses from the gross income to find the net income. This will provide you with a more accurate representation of your actual take-home pay.
By following these steps, you can determine your total monthly income and better manage your finances.
4. Analyzing Your Monthly Expenses
Monthly expenses include rent, utilities, groceries, transportation, dining, entertainment, and miscellaneous expenses. Rent takes up the largest portion of your expenses, followed by utilities such as:
- Electricity
- Internet
- Water
Groceries also account for a significant portion, Your transportation expenses may include:
- Gas
- Occasional Ride-Sharing
- Public Transit
Dining and entertainment consist of eating out, streaming services, and recreational activities. Miscellaneous expenses cover personal care, household supplies, and unforeseen costs.
By breaking down each expense category, you will be able to better understand where your money is going and identify areas for potential savings.
You may save approximately 20% of your monthly income, with a portion going into a high-yield savings account for emergencies and future expenses, and the rest into a retirement fund. You will also be able to set budget limits for discretionary spending.
5. Reviewing Your Bank Statements and Credit Card Statements
Over the past 12 months, it is important for you to thoroughly review your bank statements and credit card statements to gain insight into your financial activity.
You should look for recurring expenses, irregular spending, and patterns in your income and expenses. Identifying these trends can help you better understand your financial habits and make informed decisions about your budget.
You should pay close attention to any fees or charges that can be reduced or eliminated to save money. This could include:
- High-Interest Credit Card Charges
- Unnecessary Bank Fees
- Unused Subscriptions
By analyzing your statements, individuals can take control of your finances and make adjustments to improve your financial well-being. You should not forget to review for any fraudulent activity as well to keep your accounts secure.
Setting Financial Goals
Setting financial goals is an essential step in taking control of your financial future. By identifying and prioritizing your financial objectives, you can create a roadmap for your financial success.
Whether you want to save for a big purchase, pay off debt, build an emergency fund, or invest in your future, setting clear and achievable financial goals will provide you with the motivation and direction needed to reach your financial aspirations.
By taking the time to establish specific, measurable, attainable, relevant, and time-bound financial goals, you can work towards securing a more stable and prosperous financial future.
For legal advice regarding finances, you can contact the experienced bankruptcy attorneys at Frego Law to schedule a consultation.
FAQs
You can plan for unexpected expenses, such as auto maintenance, by budgeting for them. You should determine the age and make of your auto and set aside money accordingly.
For appliances, You can compare their age with the average life span. For instance, if your refrigerator is six years old and the average life span is 10 years, you could save $25 a month for the next four years to prepare for a new refrigerator. [2]
Commonly suggested guidelines for emergency savings recommend having three to six months’ worth of expenses saved. Nevertheless, the needed amount for an emergency fund can vary depending on factors such as income, expenses, and personal comfort levels.
For someone who starts with no savings, setting a goal of $500 or $1,000 can provide a good starting point for cultivating a savings habit. Review the budget monthly to identify potential areas for additional savings. Every contribution matters until your emergency savings reaches a level where you feel secure. [3]
When your income increases, paying bills becomes less stressful for individuals, and it may be easier to manage debt or enhance your savings.
The frequency of asking oneself this budget question can depend on your individual situation, but it’s worth considering at least once a year.
Some ways in which you might be able to increase income include getting a part-time job, taking on more hours at your current job, negotiating a raise, or starting a low-cost side hustle. [3]
Sources:
[1] Making a Budget. (2022, March 1). consumer.gov. https://consumer.gov/managing-your-money/making-budget
[2] Bergeron, K. (2016, June 2). 5 Questions to Ask Before You Prepare a Budget. Quicken Blog. https://www.quicken.com/blog/5-questions-ask-you-prepare-budget/
[3]14 Budgeting Questions to Ask. (2022, November 14). SoFi. https://www.sofi.com/learn/content/budgeting-questions/
