Another year is behind us, and it is time to prepare for 2022! A new year is a perfect chance to get your finances in check and ensure that you stay on track with your spending and saving. Here are five tips for making a personal budget and setting yourself up for financial success.
1. Determine Your Income
The first step to creating your budget is determining how much money you are taking in. This should include income from all sources. Salary, rental income, investment income, family gifts, and side hustle income should all be considered.
A good rule of thumb is to determine what your after-tax income will be. Your after-tax income, or net income, is what you will have left over after paying all necessary taxes and income deductions. This s a true representation of what your cash flow will be.
2. Calculate and Analyze Expenses
The next step in creating your personal budget is preparing a list of your monthly outflows. Write down and categorize all your expenditures. This could include:
- Grocery Bills
- Rent/Mortgage Payments
- Car Payments
- Transit Passes
- Gym Memberships
- Cable/Streaming Subscriptions
- Personal Expenses
- Leisure Expenditures
- Loan Payments
- Travel Expenses
Once you have determined what your monthly expenses are, break them down into two categories: Fixed and Discretionary. Fixed expenses are any payments that are non-negotiable. Think of bills such as your mortgage or power bill as fixed. Discretionary expenses are anything that could be considered unnecessary, such as a takeout bill. Now is the time to be honest with yourself about any frivolous spending. Determine what you can live without and redirect that money to savings instead.
3. Determine Cash Flow Surplus/deficit
Once you have determined your income and expenses, you can determine whether you are living in a cash flow surplus or deficit. A surplus would mean you have money left over at the end of every month. This surplus can be put towards paying down personal loans or put into savings. A deficit means that you are spending more than you are making, and more likely than not relying on credit cards to get you through.
If you find yourself in a deficit, it is time to seriously cut back on the spending. Go through your expense list and eliminate anything that is unnecessary. You should get yourself to a place where you are at least breaking even, if not in a surplus.
4. Plan for Your Savings
Employ the “pay yourself first” strategy when it comes to making a budget. Once you have an idea of what your monthly income and expenses are, you can determine how much you can afford to save each month. Once you have established this number you will need to determine the most productive way to use this cash. Perhaps you are hoping to buy a house and are saving for a down payment. Maybe you are worried about retirement and want to invest in your future. Whatever your goals are, it is important to identify them and make a solid plan to achieve them.
5. Commit to your Budget
Taking the time to prepare a budget is one thing; actually, sticking to it is another. It can be difficult to stick to a budget all the time, but it is the best way to get a head of your finances. Ensure that you leave some wiggle room in your budget for “fun.” This will stop you from feeling restricted and allow you enjoy your hard-earned cash, all the while setting yourself up for financial success.