Most of us need to know where our money is going. Even people who earn a good income develop a budget to keep track of their monthly expenses. Budget planning is used to help you meet your short and long-term financial goals. By creating a monthly budget, you can better manage your income and expenses. Depending on your goals, you may be trying to shave expenses from your budget plan or looking to see if you have room to add an additional expense.
If you read our section on Money Management for Graduates, you are probably trying to balance many financial goals on an entry level salary. New graduates can face financial challenges from paying off student loans, to balancing transportation, housing and other expenses. Use the information below to help you create a monthly budget and improve your financial decision making.
Creating a Monthly Budget
Creating a monthly budget is relatively easy. If you don’t know your monthly income and expenses, have your statements and paycheck stubs handy. Here are some useful calculator tools: youcandealwithit, mappingyourfuture and clearpoint.
Budget planning is more than merely listing out your current bills. You want to use the results of your monthly budget to help you make future financial decisions. In addition to your monthly budget, create a list of your short and long-term financial goals. You want to turn your current monthly budget into a plan to help you reach those financial goals. That might include:
- Trimming expenses from your monthly budget
- Refinancing your student loans to lower your monthly payment
- Contributing to a 401k account
- Saving for a new car, vacation or home
Here’s an example of how you can make important financial decisions based on your monthly budget:
You want to purchase a new car. Create a monthly budget, listing each expense in one column, and all of your income in another. What is the difference between your income and expenses every month? Do you have enough money to make a car payment every month, while still meeting all of your other monthly obligations (bills, 401k, savings contributions, etc.)?
If you have enough to make the car payment…
Consider how long it would take you to save enough to make a down payment on the car and how long it would take you to pay for the car entirely. If you could pay for the car in cash, you could avoid adding a monthly car payment to your budget plan AND incurring interest charges from an auto loan.
If you don’t have enough to make the car payment…
You’ve got some choices to make. Do you really need a new car? Can you buy a used vehicle and reduce your monthly obligation? If your monthly car budget can’t change, that means cutting or reducing other expenses in your monthly budget. A good place to start might be reviewing non-essential expenses like entertainment, cable, travel or your phone bill. If you don’t want to cut any of your existing expenses, you may also want to look at ways you can increase your income, such as taking an additional part-time job.