It’s true that most of us live paycheck to paycheck, meaning that your monthly spending occurs at the same level and pace as your monthly income. This is a challenging way to live, but nevertheless, it is the reality for many people. In most cases, planning a monthly budget cannot only help to ensure that all of your financial obligations are met, but it can also illuminate opportunities for considerable savings.
If you have never planned a monthly budget, not to worry, it’s never too late to get started. Here’s what everybody ought to know about monthly budgets:
You Need A Complete Picture of Your Finances
In order to really understand your monthly finances, you will want to collect all of your monthly bills, statements and receipts. Looking at your monthly bank statement will give you a good idea of what you’re spending – if you run all of your expenses through a bank account. We recommend that you use your credit or debit card to keep track of all purchases and payments. Using your credit or debit card will make it easier to document your monthly output.
Once you have all of your monthly expenditures documented, then it’s time to organize your bills and receipts into two categories: essentials and non-essentials. Essentials will include the items that you must pay each month in order to live and survive. This includes rent, utilities and food. All of the other statements and receipts will be classified as non-essentials, allowing you to make decisions regarding what non-essential items are most important to you.
If you don’t have a month’s worth of receipts for your spending, then start saving them right away. Set aside an envelope, folder or small bag and start collecting all of your receipts as you get them. Many people make the mistake of putting this step off until the first of the month, but you don’t need to wait. Start today and collect documents through the same time period for next month, this will give you a good picture of all of the expenses you incur in any given month.
Establishing Priorities Will Help You Reach Your Goals
Now, it’s time to start thinking about your financial goals. Do you want to save for a new home? Do you need money for college? Are you planning a special vacation or anniversary trip? Are your goals realistic and measurable? Whatever your financial goals, creating a monthly budget will allow you to prioritize your spending in order to make sure that you plan for funding to meet those goals.
As we mentioned above, categorizing your monthly spending is important. This will allow you to look at the total pool of money that you have left over after paying your essential bills. Once you know your monthly balance for non-essential spending, it’s time to prioritize each item starting with funding the areas that will help you to reach your financial goals. If this means starting a savings account or a retirement account, then talk with one of our bank representatives who can help you get started. Setting priorities and sticking to your budget will help you to reach your goals.
You Should Budget for Savings AND Emergency Funds
We all know that unplanned expenses happen in any given month – a car repair, home repair, medical bill or any other emergency situation can leave your savings account depleted in the blink of an eye. That is why it’s important to set aside money for emergencies.
As you are creating your monthly budget, be sure to make savings and your emergency fund separate line items. In fact, your emergency fund should be an essential item, even if you only budget a small amount each month. Plan for those unexpected expenses that you know you can expect at some point in the year. If you end up with a year free of emergencies or urgent expenditures, then you can roll that money into savings for emergencies the following year. You may also be able to decrease the monthly budgeted amount for the next year since you have a starting base.
Annual and Quarterly Bills Should Have a Line Item in Your Monthly Budget
Some bills are meant to be paid once per year or every quarter. Things like property taxes, homeowners association and condo fees, or even subscription payments. It’s a good idea to plan for annual or quarterly expenses within your monthly budget.
In other words, you don’t want to wait until you receive an annual or quarterly bill to try and squeeze that money from your monthly budget to pay it. If you’re living paycheck to paycheck, this can be an impossible task and many times this is where people fall behind on bills and accumulate late payments.
Once you determine the amount for your annual or quarterly payment, then you’ll want to divide that amount by 11 for annual payments or by two for quarterly payments and put the divided amount into your monthly budget. It may help to move this allocated money into a savings account for your annual expenses so that you don’t forget and spend it.
Setting a monthly budget is important in order to make the most of your income and ensure that you can realize your financial and life goals. We all know how challenging it can be to live from one paycheck to the next, but the challenge doesn’t have to be overwhelming or even impossible with proper planning and information, you can put these tips on what everybody ought to know about monthly budgets to good use.
If you have questions about planning a monthly budget or establishing a savings account and emergency fund, please feel free to contact us for more information.