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Whether you want to create a personal plan list or just get a better understanding of money management, begin with these six steps.

Even if you don’t use a budget spreadsheet, you still need some way to determine where your money goes each month. Using a template to build a plan will make you feel more in control of your finances and save cash for your goals. The challenge is to figure out a way that fits for you to manage your finances. You can create a budget using the following steps.

Step 1: Note your net income

The first step in creating a budget is to identify how much money you get in. However, keep in mind that it is easy to overestimate what you can afford if you think of your overall income as what you have to spend. Remember to subtract your deductions when creating a budget worksheet, such as Social Security, taxes, 401(k) and flexible expenditure account allocations. Your final take-home pay is called net income, which is the number that you should use to create a budget.

Tip: You may be able to find a way to boost your earnings if you have a passion or a skill. It can also be good to have an additional source of income if you ever lose your job.

Step 2: Track your spending

It’s helpful to keep track of your spending and categorize it so you know where to make adjustments. Doing so will help you identify the most money you spend on and where cutting back might be easier.

Start by listing all of your fixed expenses. These are recurring routine expenses such as rent or mortgage, insurance or fees for vehicles. It is doubtful that you will be able to cut down on these, but it can be helpful to know how much of your monthly income they consume.

Next list all of your variable expenses — those that may vary from month to month, such as food, gas, and entertainment. This is an area where you might find opportunities to cut back. Credit card and bank statements are a good place to start since they often itemize or categorize your monthly expenditures. 

Tip: Record your daily spending with anything that’s handy—a pen and paper, an app or your smartphone.

Step 3: Set your goals

Make a list of all the financial goals you want to achieve in the short and long term before you begin sifting through the information you’ve tracked. Short-term goals should take no longer than a year to achieve. Long-term goals, such as saving for retirement or your child’s education, may take years to reach. Remember, your goals don’t have to be set in stone, but identifying your priorities before you start planning a budget will help. For example, it may be easier to cut spending if you know your short-term goal is to reduce credit card debt.

Step 4: Make a plan

Use the variable and fixed expenses you compiled to help you get a sense of what you’ll spend in the coming months. With your fixed expenses, you can predict fairly accurately how much you’ll have to budget for. Use your past spending habits as a guide when trying to predict your variable expenses. 

You may choose to further split your expenses, between things you need to have and things you want to have. For instance, if you drive every day to work, petrol is likely to count as a need. However, a monthly music subscription can be counted as a want. When it is time to make adjustments, this difference is important. 

Step 5: Adjust your habits if necessary

When all this has been finished, you have what you need to complete your budget. Once you have documented your income and spending, you can begin knowing where you have money left over or where you can cut back so that you can put money towards your goals.

Want-to-have expenses are the first area to look for spending cuts. Can you skip movie night in favor of a movie at home? Try adjusting the numbers you’ve tracked to see how much money that frees up.  If you’ve already adjusted your spending on wants, evaluate your spending on needs. You may need internet at home, but do you need the fastest available? 

Lastly, if the numbers still aren’t adding up, you can look at adjusting your fixed expenses. Doing so will be much more difficult and require greater discipline, but on close inspection a “need” may just be a “hard to part with.” Such decisions come with big trade-offs, so make sure you carefully weigh your options. 

Tip: Small savings can add up to a lot of money, so don’t overlook the little stuff. You might be surprised at how much extra money you accumulate by making one minor adjustment at a time.

Step 6: Keep checking in

It’s important that you review your budget on a regular basis to be sure you are staying on track. You can also compare your monthly expenses to those of people similar to you. Few elements of your budget are set in stone: You may get a raise, your expenses may increase or you may have reached your goal and want to plan for a new one. Whatever the reason, keep checking in with your budget following the steps above.



Source : Bank of America

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