iQuanti: Budgeting can be a challenge for many people who feel that a budget is just another word for a restriction. But the purpose of a budget is to help you balance long-term financial goals, like saving and investing, with short-term wants, like taking trips with friends or shopping sprees.
That means the budget you create should provide a healthy balance of allowing you to live your life today with planning for a more financially sound tomorrow. Here's what you need to know about how to effectively budget for your monthly expenses.
Calculate the Essentials
Every budget clearly distinguishes between wants and needs or non-essentials and essentials to figure out how much money you must spend each month to keep your household running. This includes expenses like:
Food: The cost of groceries will definitely go in this category, but the budget for eating out may fall under non-essentials instead.
Housing: Your rent or mortgage payments fall into this category, along with home insurance, utilities, and other bills required to keep your home safe and comfortable.
Insurance: This includes premium payments for health, life, and other mandatory types of insurance coverage. While some people may feel that certain types of insurance like life insurance aren't essential, they definitely are. Knowing how life insurance works is essential to protect your family in the event of your untimely passing. Without this essential, your family could face financial hardship when you're gone.
Transportation: If you have a car, everything that keeps the car running will go here. That includes the cost of gas, oil changes, and auto insurance. Any public transportation costs like taking the bus, metro or Uber also fit here.
Savings/Investing: If you're building an emergency fund or trying to hit a short-term savings goal, be sure to pay yourself first as an essential. The same goes for contributions to retirement plans or brokerage accounts for long-term investments.
Calculate the Non-essentials
You can typically handle the wants section of your budget in two ways.
Create a lump sum "non-essentials" category for whatever comes up.
Divide up into smaller categories like eating out, travel, and entertainment.
Either way you choose to handle it, make sure you plan to leave at least a little space in your monthly budget for short-term wants. Failure to plan for this area of your budget means you may be strapping yourself too much and overspend later in an act of rebellion.
Subtract Expenses from Income
The next task is to add up your monthly income from all sources. That includes any money you earn from a full-time job, side hustle, part-time work, rental income or otherwise. Then, take that number and subtract the total monthly expenses you determined for both wants and needs.
Regardless of which budgeting approach you choose, it's best to try and make a plan for all of your income. That means if your income is $3,000 a month and expenses are only $2,500, you need to plan where that extra $500 goes. If you don't tell it where to go, it often slips away on impulse buys or online shopping.
The Bottom Line
The best budget for your monthly expenses is the one you'll be able to achieve. And budgeting is a process that will morph and change over time. That means you don't need to commit to one budgeting approach for a lifetime. Instead, feel free to take pieces of different ideas to create a budget that works to keep your needs and wants satisfied while planning for your longer-term financial goals too.
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