Creating a Realistic Budget
Nothing is more satisfying than Pay Day. A reward for the hard work you’ve put in during the week and some cash in the bank to spend. But like most people, come the end of the month, there’s little to no cash left in the bank and you’re not sure where your money went.
This is where having a monthly budget comes in handy. With a budget, you’ll keep tabs on the money going in and out of your bank account, as well as set up a strong financial foundation. Whether you’re a budgeting newbie or need a refresher, let’s go through the 3 parts you’ll need to create a solid budget.
Part 1: Total Monthly Take-Home Pay
To create your budget, you’ll first need to know how much money you can actually spend each month. You’ll want to use the take-home portion of your paycheck (after taxes and payroll deductions) as your base since this is the money actually ending up in your bank account every month. If you have any side hustles or part-time work, include these amounts minus any taxes or money set aside for taxes.
Part 2: Total Required Monthly Expenses
Required Monthly Expenses, or Non-discretionary expenses, are (by definition) essential expenses, occurring monthly or annually, that are required to be paid. These expenses comprise of both debt and recurring bills, as well as some living expenses, and usually include:
Day-to-Day Living Expenses
- Gas, Parking and Tolls
- Auto/Home Maintenance Costs
- Utility Bills
- Loan Payments (Mortgage, Car Loans, Personal Loans, etc.)
- Credit Card Payments
- Netflix, Hulu, and Other Subscriptions
Insurance and Health Care Costs
- Insurance Premium Payments not deducted from your paycheck (Homeowners/Renters, Life, Auto, etc.)
- Insurance Deductibles/Copayments
Other Non-Discretionary Expenses
- Alimony/Child/Parent/Dependent Support
- Tuition and Education Expenses
- Association Fees/Dues
- If you pay any of these amounts annually, you’ll need to divide that amount by 12 to get the monthly cost. For expenses occurring less frequently than annually (such as copays and deductibles), estimate how much you’ll spend on these this year and divide that by 12. Setting a portion of these payments aside every month will ensure you have the money to pay for them without having to dip into your paycheck or savings.
- If you provide any charitable or religious contributions, add those to your monthly expenses in this step as well.
Part 3: Remaining Funds
Your Remaining Funds, or how much is left over at the end of the month, can be split between financial goals (emergency fund, saving for a home, retirement, travel, paying off debt, etc.,) and fun spending (movies, restaurants, hobbies, etc). The key is striking a balance between the lifestyle you want to live now and achieving your financial dreams, without feeling overwhelmed or deprived. You should aim to split this amount 50/50 or put more towards your goals to secure your financial future, depending on your circumstances.
- When there’s little to no Remaining Funds left at the end of the month, you should take a look at your non-discretionary expenses and consider trimming costs where you can to free up cash.
The most important job a budget does is letting you know where your hard-earned money is going. That way, you’ll be able to recognize if you’re overspending or have more money at the end of the month than you realized. Crafting a budget by yourself will help you get a handle on your current finances quickly and efficiently. But if you’re having trouble creating a realistic budget or sticking to one, you may want to seek outside help. Our CFP® Professionals can help you craft a realistic budget by providing an objective view of your finances, as well as someone to adjust your budget over time and talk through any issues you may have sticking to your new budget.
Keep saving and building—your financial freedom is in the works!