Creating a monthly budget can be intimidating the very first time, “What do I include in my Monthly Budget?” Every little purchase starts to add up so it’s important to not overlook even the small insignificant seeming stuff.
Setting up your budget for the first time may not be what you call fun, but it is an essential part of the “process” to understand where the money is going. Your goal of budgeting should not be “pinch” pennies, but instead direct your cashflow to the right areas of your life.
That’s why we’ve compiled a list of essential expenses that need to be included in your monthly budget. So, whether you’re a student, a young professional, or a family, keep reading to discover the must haves that should be part of your monthly budget.
Why is a monthly budget is important for you?
A healthy monthly budget is crucial for financial stability. When expenses become greater than income, you create a deficit, therefore millionaires and minimum wage earners alike need to utilize some sort of budget. By creating a budget, you’ll be able to identify areas where you can cut back and make adjustments to your spending habits. With these small changes you will start to see that small pockets of money become available for your money goals!
Fixed expenses vs. variable expenses
When creating a budget, it’s important to distinguish between fixed expenses and variable expenses. Fixed expenses are costs that remain the same every month. They are extremely easy to predict , but unfortunately you don’t have as much control over these types of expenses. Rent or mortgage payments, car payments, and health and home insurance premiums are all examples of fixed expenses for your budget. When it comes to your fixed expenses the most important step is analyzing what you can afford before you buy it. Realizing you can’t afford the car or house after you purchase it just sets up a paycheck to paycheck situation.
The 50 30 20 Budgeting Rule is a good starting point for analyzing necessities. The rule states that approximately 50% of your monthly take home pay should be allocated for “needs.” Housing, transportation, and utilities are among some of the expenses that go into your needs category. Another great rule for house affordability is utilizing the 28% percent rule for purchasing a home. This rule states that a mortgage payment should be at or below 28% of your pre-tax income for you to be able to afford it comfortably.
Variable expenses, on the other hand, are costs that can fluctuate from month to month, such as groceries, entertainment, and personal care. These costs should also be included in your budget, but you may be a bit trickier to predict. These prediction will come with budget practice and before long your “variable” expenses will almost be known if you are tracking properly.
The advantage of variable expenses is that they often give you the most flexibility when it comes budget adjustments. Spending too much on entertainment, cut back a few nights a month. Not using a subscription service after your favorite show has end, cancel it. With all your expenses laid out with a budget tracker, the daunting task of trimming back becomes managable.
Essential fixed expenses to include in your monthly budget
1. Rent/mortgage payments: Your housing costs are likely your largest expense. Make sure to include your rent or mortgage payment in your budget and remember the 28% Rule and 50-30-20 Budgeting if you need some guidance here.
2. Utilities: This includes electricity, water, gas, garbage, etc. These costs are necessary and should be included in your budget.
3. Car payments: If you have a car loan, make sure to include your monthly payment in your budget.
4. Insurance premiums: This includes health, car, and home insurance.
5. Childcare is becoming more frequent in couples as both parents go into the work force.
6. Cell phone plans. Normally a fixed expense, almost an essential item for most in this day and age. Play around with plan pricing to see if you can cut back.
Essential variable expenses to include in your monthly budget
1. Groceries: Food is a necessary expense, but it’s important to budget for it. Plan your meals ahead of time and make a grocery list to avoid overspending. Buy in bulk when items go on sale.
2. Transportation: This includes gas, public transportation, and ride-sharing services. If you have a car, make sure to budget for gas and maintenance costs. Often people just look at the loan payment on a vehicle and not the overall costs associated with it. Can you afford to properly maintain the vehicle, does it take premium gas?
3. Entertainment: This includes movies, concerts, and other leisure activities. It’s important to have some room in your budget for entertainment, but make sure to prioritize your spending.
4. Personal care: This includes toiletries, haircuts, and other personal hygiene expenses. These costs may vary from month to month, but should still need to be budgeted for.
5. Debt Payoff. This could be payments above your monthly minimums. This article talks about the best debt repayment method down below.
6. Savings and Investments: You should be able to turn these on and off like a faucet to control the flow from your monthly income. If unexpected expenses pop up, trim back on your investments. If you did well and have a surplus, go hard toward your emergency fund or Acorns investment account!
Non-essential expenses to cut from your budget
While it’s important to have some room in your budget for entertainment and personal care, there are some non-essential expenses that you may be able to cut back on. These include:
1. Eating out: Dining out can be expensive. Try to limit the number of times you eat out each month or find cheaper alternatives. This is an area where you can recapture a lot of your income by cutting back. It’s a great starting point for those looking to cut back.
2. “Subscription Creep”: While services like Netflix and Spotify may seem affordable, the costs can add up. Make a Subscription List, and cancel what you don’t use regularly. People are proud they don’t “pay for cable” but don’t realize they have added enough subscriptions over the years that they are in the same spot before. I almost guarantee there are 1-3 subscriptions that you use once a month, axe it from your budget.
3. Impulse purchases: Think twice before making an impulse purchase. Ask yourself if it’s something you really need or if it’s just a want. Also research your purchases so that you are not buying items multiple times. Often it is smarter for your budget to pay a bit more for a quality item than paying for the same thing time and time again. Frugality vs. cheap, there’s a difference.
4. Vacations: Budget for them or don’t go on them. Impulse travel is fun and spontaneous, but it often costs significantly more.
How to prioritize your expenses
When creating a budget, it’s important to prioritize your expenses. Start by listing your necessary expenses, such as housing, utilities, and food. Then, prioritize your variable expenses based on what’s most important to you. For example, if you enjoy dining out, make sure to budget for it. However, if you would rather save money for a future vacation, prioritize your savings instead.
Amazon purchases are fine, but make sure its not forcing you to change your healthy eating habits because you can’t afford groceries.
Make a list of important aspects of your life. Since health and family is such a big priority in my life, I make sure I prioritize our budget for groceries and leave a small amount of room for family fun such as a beach vacation. I choose to make my sacrifice in my vehicle purchase. Yes I want the $70,000 fully loaded SUV, however, buying something slightly used which was still nice and safe made more sense for our budget priorities.
Budgeting should be a part of your routine, not as a thorn in your side, to help you achieve your goals. Want some advice on setting up some money goals. Read the article How to Budget with a section about defining your money goals! You cannot miss this step in your budgeting, it is so important!
Tools to help you create and stick to your budget
There are a variety of tools available to help you create and stick to your budget. Here are a few options:
1. Budgeting apps: Apps like Mint and You Need A Budget can help you track your spending and create a budget. Some of these apps supply fantastic learning material to help you grow through the budgeting process. To get a full list read my favorite budgeting apps for this year.
3. Pen and paper: Sometimes, the simplest method is the best. Use a notebook or planner to track your expenses and create your budget.
Creating a Debt Payoff Plan
Debt comes in all different forms, you could have a 3% 30-year mortgage, a 4.5% student loan, or a 26% credit card debt. Prioritizing which debts to go after is not always a clear process. That is what a debt payoff plan is needed.
There are two general methods for debt repayment, the Snowball Method and the Avalanche Method. The first prioritizes paying off small balances while ignoring the interest rates. The idea is to get a bunch of small debt payoff “victories” and get the proverbial snowball rolling. It’s encouraging and motivating which helps you get up and running on paying back those loans with a purpose.
The Avalanche Method prioritizes paying off the highest interest rate debt first no matter what the balance size is. This is the most cost effective method, but may not have the most overall effectiveness for you. Bigger balances may prove slow to payoff and you may seem like you are getting nowhere. It may be discouraging to payoff a high interest loan and only see the balance shrink by small amounts over time.
The best Debt Payoff Plan is the one that works for you!
Adjusting your budget as your financial situation changes
Your financial situation may change over time, which means your budget may need to be adjusted. For example, if you receive a raise at work, you may be able to increase your entertainment budget. However if you’re really looking to supercharge your savings or investment money, when you raise comes in, treat it as though nothing happened and funnel all that money toward high interest debt, an emergency fund, and finally toward a retirement/investment account.
On the other hand, if you experience a decrease in income, you may need to cut back on non-essential expenses. It’s important to regularly evaluate your budget and make adjustments as needed.
Final budgeting tips
Creating a monthly budget can be a challenge, but it’s an essential step towards achieving financial stability. By including essential fixed and variable expenses in your budget, prioritizing your spending, and utilizing budgeting tools, you can create a budget that works for you. With expenses laid out the trimming process becomes less complex. Remember to regularly evaluate and adjust your budget as your financial situation changes. With these tips, you’ll be well on your way towards achieving your financial goals.