If you’re not used to closely monitoring your finances, the changing balance on your checking account from one month to the next can seem like a total mystery. Sure, if you have a steady income, you probably have a basic sense of how much you earn and how much you spend in a month. Hopefully you don’t overdraft or tack on credit card debt regularly.
With that basic understanding, you may be wondering why you even need a personal monthly budget. You’re a responsible person, so what’s the problem with just winging it?
Why you need a personal monthly budget
The answer is, unless you’re naturally frugal, you could be selling your future short. Even if you wind up saving a bit from one month to the next, your money could be working a lot harder for you than just providing extra padding that keeps your monthly balance from approaching zero.
For many people, however, expenses can creep up if they’re not careful. Without a budget, at the end of the month, they may find they’re nowhere near a realistic benchmark on the road toward long-term savings.
A personal monthly budget helps you break broader financial goals down into regular, manageable steps you can take toward a more secure future.
First steps for a personal monthly budget
If you’re ready to start making your personal monthly budget from scratch, here are some simple tactics to get you started.
Establishing goals and assessing your current spending patterns
Your budget is a balancing act between your expenses and your ambitions.
So first, take a moment to figure out what those ambitions are. Maybe you have high-interest debt you want to pay off in a hurry. Do you want to start building your emergency fund while paying down outstanding low-interest debt? Are you trying to save for a down payment on your first home or an engagement ring for your future spouse? Perhaps you’re pretty financially established and you’re looking for ways to get your retirement savings back on track.
Whatever your situation is, put a price tag on your goal and set a personal deadline for when you’d like to achieve it.
Next, get a baseline understanding of your current spending habits. Review bank statements and tally up how much you’ve spent in particular categories, including any automatic bill payments you’ve set up. For cash withdrawals, attempt to discern, roughly, where the money was spent.
Organize your different spending categories based on what is fixed or variable and what’s necessary or discretionary. This will help you adjust your figures once you actually start drafting a budget. For instance, a gas heating bill would be necessary but variable, since it will likely be higher during cold months. On the other hand, a monthly subscription to a streaming service might be fixed, but discretionary. You could probably cut it out pretty easily if you had to.
You may be wondering if what you currently spend is considered responsible or sustainable. While that’s ultimately up to you and a matter of your priorities, here are some figures that can help you discern if your spending is in line with your peers:
- According to the Department of Housing and Urban Development, spending more than 30% of your household income on housing is considered to be a cost burden. Still, HUD claimed that about 12 million households spend more than 50% on housing.
- A report from the Bureau of Labor Statistics found that transportation was the next biggest household expenditure after housing, accounting for 15.9% of annual expenses on average.
- Food was third in that survey, and the Department of Agriculture reported that, based on income, food expenses varied widely as a proportion of the household budget. The highest-earning quintile spent 8.2% of their income on food while those in the lowest-earning quintile spent 35.1% of their income on food.
Where you live has a big impact on how much each of these categories costs, so keep that in mind as you make your budget.
Translating your understanding into monthly benchmarks
First of all, it’s important to bring all earners in your household together for the budgeting process. You may be saving together for shared future expenses, and you could decide to split certain costs proportionally based on your shared and personal saving goals, lifestyle choices and income streams.
If you have an income that can change from one month to the next, assume that you’re budgeting for a low-earning month. This is the safest approach.
Think about your long-term goal’s price tag and its timeline. Divide the total amount you want to save or invest - or the amount of debt you want to clear out - by the number of months between then and now. That’s how much you have to save per month. For goals that are very far head, be sure to factor compounding interest into your calculations.
Next, add your monthly saving goal to your fixed, necessary expenses. Then, include estimates for the next month for your variable, necessary expenses. Do you still have money left over and a comfortable cushion? Add your fixed and flexible discretionary spending back in.
If you’re still comfortably far away from zero, label your leftover funds as a miscellaneous category. This will give you a little padding in case some of your estimates were off or you wind up with small, unanticipated expenses.
If the first draft of your budget winds up in the red, start trimming discretionary expenses, beginning with the flexible ones. Maybe you budgeted more than you really need for eating out or entertainment, and with a little self-discipline, you can reel that in. You can cut fixed discretionary expenses, too.
Adjust flexible necessary expenses next. Maybe you can keep the thermostat a little lower or try to save on groceries by clipping coupons and going to a bargain store. Fixed necessary expenses, like rent, will be hard to change from one month to the next, though you may be able to look for more affordable housing in the future.
If it’s still impossible to make the numbers add up, you may need to adjust your long-term goals.
It can take some tweaking and multiple drafts, but once you have a budget established, it will be a weight off your mind.
Make sure, however, that you don’t just view your leftover miscellaneous funds as part of your discretionary budget. You could be tempted to dip into it for frivolous purchases. Periodically, use it to add to your emergency fund or retirement savings.
Once you’ve established your monthly budget, push yourself to stick to it by keeping your long-term goals in mind if you’re tempted to overspend. Take out a limited amount of cash for certain outings where you’re likely to spend money impulsively.
Financial Tools from Trustmark can help you understand your spending habits, produce a realistic budget and track your spending by category over time. This online service will help you refine your personal monthly budget as circumstances change. Find out more about Financial Tools here.