At the end of the month, you should compare your estimated expenses with your actual expenses.
“Use a budget” – That’s what all the personal finance gurus, money blogs and financial magazines seem to tell you. But how do you create a budget that’s perfect for your home, your family’s needs, and your lifestyle, without compromising on the end goal: saving money?
Here are the seven steps you can take to establish an ideal monthly budget for your household.
Decide how you will document your budget
Whether you opt for a pen and paper budget, an Excel spreadsheet, or an electronic budget on a budgeting app, choose the style you are most comfortable with.
You can print a budgeting format of your choice or write one to suit your specific needs. You can also use a budget template to use in an Excel spreadsheet. If you use a budgeting app, it usually offers customizable budgets, and the app does most of the work for you.
Start with your income
You most likely have only one source of income, so list that first. If you took on freelance or part-time work, add that to the total income. If you have an uncertain income or one that varies every month, be careful and enter the amount that seems realistic and not too optimistic to you.
Categorize and list your expenses
Since paying off debt should be high on your priority list, start there. List all of your loan payments and credit card charges separately. Once you’ve allocated some of your income to these repayments, move on to other expenses.
Then list “needs” which include fixed and recurring expenses like house rent, utilities, children’s school fees and groceries. Then list “needs” under discretionary expenses such as personal expenses (bathroom, entertainment, dining out, etc.)
Don’t neglect your retirement savings and emergency fund
Most budget beginners tend to only look at their income and expenses. It’s equally important that you dedicate some of your income to retirement savings and long-term investments.
You should also remember to set aside a small portion of your salary to build up an emergency fund which should ideally be worth three to six months of expenses and need to be replenished in case of an emergency.
Calculate expected expenses in each category
You would already have a clear idea of how much you should allocate to unavoidable recurring expenses. But when it comes to discretionary expenses, you need to control them by allocating a fixed amount for these expenses. For example, you can allocate 500 Dh each month to dining out, 500 Dh to personal purchases, etc. To achieve the end goal of saving more money, make sure you don’t exceed your planned expenses.
Compare planned spending to actual spending
At the end of the month, you should compare your estimated expenses with your actual expenses. Add up all your expenses each month and compare this amount to the total planned expenses. Also compare this to the amount you’ve spent over the past few months to get a good idea of how you’re doing in terms of managing your expenses.
It is equally important to compare planned and actual spending across all individual spending categories, especially discretionary spending categories. So you’ll know exactly what you overspent on and how to limit that next time.
Make adjustments to increase your savings
Remember to look at the big picture. If you find that rent is eating away at most of your salary, consider moving to cheaper housing. Also look for other ways to reduce your expenses, such as reducing underutilized monthly subscriptions, such as your TV subscription, or downgrading your mobile plan, to reduce fixed recurring expenses.
You will also need to adjust your allowances if you get a raise. It’s best to increase your allocation as much as possible toward primary goals like paying down debt and setting aside more for long-term investments.
The writer is the founder and CEO of souqalmal.com. The opinions expressed are his own and do not reflect the policy of the newspaper.