How to Create a Budget Plan in Six Simple Steps
A balanced budget is vital to your success in both personal and professional areas of life. Your budget is the summary of your total income and expenses during a particular time period. Regularly tracking your finances helps you visualize your current budget and spending patterns. With this insight, you can reliably plan for future investments.
Why Should I Create a Budget Plan?
Balanced budgeting is a habit building strategy that is beneficial and applicable in many areas of life. Whether you wish to sustain your quality of living or cultivate a business, an organized budget plan helps you to effectively manage your finances and empowers you to pursue your personal and career goals. The following article will explain how to create an effective budget plan in six straightforward steps.
How to Create a Budget Plan in Six Steps
Step One — Gather Your Financial Information
Start by compiling as many records of your financial activity as possible. This includes every bill, invoice and paycheck you have access to. Include both digital and physical receipts. You will benefit from being as thorough as possible. The more information you include, the more accurate your totals will be. Be sure to select a fixed window of time to compile this information from. A single month should provide you with the information you need to reliably detect your spending patterns.
Step Two — List Your Sources of Income
Using the information you gathered, create a list of your monthly sources of income. Include both self-reported income and taxable paychecks. When recording a source of taxable income, include only the dollar amount that you personally keep. Any refunded payments or gift money you received during this time should be included in this list as well. If you are a business owner, include hourly earnings, product sales and any investment income to this list.
Step Three — List Your Expenses
You will also need to create a list of the expenses that will be subtracted from your total monthly income. This list can include utility fees, grocery expenses, insurance payments, car payments, credit payments, medical expenses, savings deposits and your mortgage or rent. Be sure to include any monthly subscriptions to this list, such as cable, phone or gym memberships. Donations, tip and gifted money also should be accounted for. Business owners should additionally account for all business costs.
Step Four — Sort Between Fixed and Variable Expenses
Once you have thoroughly compiled your expense list, you will need to categorize each expense as either fixed or variable. This will help you to prioritize your vital expenses and gauge your flexibility to make changes in other areas of spending.
Fixed expenses are predictable. They are characterized by having both steady cost and frequency. Often, these expenses are necessities for living. Your monthly rent and car payment are examples of fixed expenses. Perhaps you make regular tuition payments if you are a student or parent. Additionally, any form of subscription fee is a fixed expense. Fixed expenses typically can not be adjusted as freely as variable expenses can. If you are a business owner, you will inevitably have several fixed expenses that are necessary to maintaining your business.
Fixed expenses can include:
Insurance
Rent or Mortgage
Utilities
Salaries
Internet
Government and Bank Fees
Cellular Service
Website Hosting
Accounting Services
Legal Services
Variable expenses fluctuate depending on circumstantial factors. They may be recurring in nature, but will not have a fixed cost. Creating a list of these expenses provides you with a specific group of areas where you can most flexibly adjust your spending. Your grocery bill, gas bill, leisurely expenses and medical expenses can all be categorized as variable. If you are a business owner, there are several potential expenses that additionally fall into this category.
Variable expenses can include:
Raw Materials
Contractor Wages
Commissions
Advertising
Other Marketing Costs
Transportation
Travel and Events
Printing Services
Step Five — Total Everything Together
After you have sorted your income and expenses, calculate your totals by adding the listed items together for each list. Your total income should exceed your total expenses, providing your budget with a stable balance. Financial balance is necessary to maintain the costs of a comfortable standard of living.
Step Six — Make Adjustments
If your income and expenses are evenly balanced, you may consider examining your variable expenses. Look for areas in which you can comfortably reduce spending without compromising your In this situation, making spending adjustments can help you to start generating surplus income. Surplus income gives you the freedom to allocate more money to your savings and emergency funds in preparation for the circumstances that you cannot predict. You might consider saving part of your surplus in order to plan a vacation and cover travel expenses. Surplus funds can also be invested in morale-boosting additions to your personal and work environments such as upgraded decor, supplies and technology.
Your New Budget Plan
Now that you have completed your initial monthly budget calculations, you have a monthly model that you can use as a reference for future finances. This model is extremely valuable for both personal and professional future planning.
Be sure to regularly inspect your budget for monthly differences. It is important that your budget stays consistent with the model you created. It is possible that you may see differences in future income or expense totals. Changes can happen for a number of reasons. Keeping track of your budget helps you identify the cause of these changes. You can then recalculate your monthly budget and make adjustments according to your needs.
Creating a budget plan gives you greater control over your finances and lets you efficiently plan for your financial future. The sooner you develop a balanced budget plan, the more proactively you will fulfill your personal and professional goals.
