Preparing a monthly budget is a necessity for most households. But when you’re planning your budget you’ll discover monthly expenses can soon add up, even if you have a larger than average income. Organizing your finances is a healthy first step in budget planning. So, let’s explore the all-important process of analyzing your monthly expenses.
If you want to control your spending and work toward your financial goals, you must create a budget.
A personal or household budget is a summary of your income and expenses for a set period of time, typically one month. While the term “budget” is frequently associated with limited spending, a budget does not have to be restrictive in order to be effective.
A budget will show you how much money you expect to bring in, then compare that to your necessary expenses (like rent and insurance) and discretionary spending (like entertainment or eating out). Instead of viewing a budget negatively, consider it a tool for achieving your financial objectives.
What Is the Purpose of a Budget?
A monthly expenses budget is a financial planning tool that allows you to plan how much money you will spend or save each month. It also lets you keep track of your spending habits.
Making a budget may not sound like the most exciting activity (and for some, it may be downright terrifying), but it is an essential part of keeping your financial house in order. This is due to the fact that budgets rely on balance. Spending less in one area allows you to spend more in another, save for a large purchase, create a “rainy day” fund, increase your savings, or invest in wealth creation.
How to Spend Your Money
Following the creation of your budget, you must monitor and continue to track your expenses in each category, ideally on a daily basis. The same budgeting spreadsheet or app that you used to create your budget can also be used to track your income and expenses.
Recording your monthly expenses will help you avoid overspending and identify unnecessary expenses or problematic spending patterns. Rather than waiting until the end of the month, spend a few minutes each day recording your expenses.
Keep track of how much you spend as you use your budget. When you reach your spending limit in a category, you must either stop spending in that category for the month or transfer money from another category to cover additional expenses.
Your budget’s goal should be to keep your monthly expenses equal to or less than your monthly income.
Fixed Versus Variable Expenses
Regardless of the size of your income, you will have many monthly expenses that quickly add up. Many of these expenses are fixed. Understanding what these fixed expenses are can help you plan your budget accordingly.
Let’s start with your fixed monthly costs. These are the common expenses you incur simply living your life.
Fixed monthly costs include:
Mortgage payments or rent
Your mortgage or rent payment is likely your largest expenditure. Since it’s the largest line item within the budget, make sure you use your housing costs as a foundation for analyzing all other irregular expenses. This is one expenditure that will likely grow, so track your housing costs regularly.
As with your housing costs, your utility costs will rise with time. Track exactly how much you’re spending on electricity and water each month. Then you can catch when you’ve been overcharged for a utility bill.
Analyzing your home insurance bills will also tell you more about your coverage. Are there insurance products you’re not capitalizing on? Carefully review your home insurance costs to see if you’re getting full value for your policy.
Like home insurance, car insurance is unfortunately one of those necessary expenses. Review how much you’re spending each month. Then call your insurance company directly to learn more about your rate. You can often negotiate a lower rate if your driving habits change.
Cable television bills
Examine your cable television bills closely. With the increasing streaming options, you’re likely extending your budget on cable entertainment. Review your full cable costs and consider either choosing a more affordable cable provider, or a streaming option available at a fraction of the cost.
Your phone bill has also doubtless risen in recent years as companies capitalize on the value smart devices bring to our lives. Calculate how much you’re spending compared with your cell phone use. You might find you don’t need added costs such as long-distance calling.
Grocery costs are a burden for any modern family. And it’s becoming increasingly difficult to afford a simple trip to the store. Keep your grocery bills and then analyze them carefully. Look at how much you’re spending on each item. You might be surprised how much you save when you cut out treats and high-end meal options.
Now it’s time to review the variable expenses. We’ve each experienced the feeling of having an unexpected bill. They usually arrive at the worst possible time. Plan for variable expenses and place these potential costs into your budget.
Variable expenses can include:
Meals out can quickly become costly. Take the time to review your spending on restaurant meals and you’ll soon find extra money to enhance your budget.
Personal hygiene items
Whether it’s cotton pads or dental floss, there are small personal hygiene items that soon become a large line item in our budget. Consider how much you’re spending and determine whether your brand is the right price for your budget.
Pet food and treats
Your pet deserves the best food you can buy. But do they need lots of treats? You may find you’re spending more on your puppy’s new organic treats than you expected.
One time home purchases such as furniture
Review those spur-of-the-moment big-ticket item purchases. You’ll see that springing for the newest sofa can have a significant impact on your spending for the month!
Payments for services such as cleaning
Your home services are another important budget item. Review how much you’re spending on items like dry cleaning and pet boarding and determine if other companies might offer better value.
Debt payments owed to family members
It can be difficult to owe money to a family member. Make an action plan to pay them back as soon as possible. Discuss the debt with them directly and try to modify your payment plan if you’re experiencing budgeting challenges.
Debt payments to credit card companies
Pay credit card debt as soon as you can. The interest on this debt is often enough to impact your ability to pay all your other debts. Review your credit card statements closely to determine how much you owe and to which companies.
Recognize the budgeting procedure
Determine your after-tax income: If you receive a regular paycheck, the amount you receive is most likely it; however, if you have automatic deductions for a 401(k), savings, and health and life insurance, add those back in to get a true picture of your savings and monthly expenses. If you have other sources of income, such as side hustles, deduct anything that reduces it, such as taxes and business expenses.
Select a budgeting strategy: Any budget must cover all of your needs, some of your desires, and — most importantly — savings for emergencies and the future. The envelope system and the zero-based budget are two examples of budgeting plans.
Keep track of your progress: Keep a spending log or use online budgeting and savings tools.
Make your savings automatic: Automate as much as possible so that the money you’ve set aside for a specific purpose arrives with little effort on your part. An accountability partner or online support group can assist you in holding yourself accountable for budget-busting decisions.
Budgeting: Because your income, expenses, and priorities will change over time, you should actively manage your budget by revisiting it on a regular basis, perhaps once a quarter. If you’re having trouble sticking to your budget, try these budgeting tips.