How to Understand Personal Finance Basics
Gather your financial statements and information., Record your monthly income., List your fixed monthly expenses., List your variable monthly expenses., Total your monthly income and expenses., Adjust your variable expenses to hit your goal., Review...
Step-by-Step Guide
-
Step 1: Gather your financial statements and information.
Creating a budget is one of the most important aspects of personal finance.
A solid budget allows you to plan for how you’ll spend the money you bring in each month and illustrates your spending patterns.
To begin, gather all the financial information you can, including bank statements, pay stubs, credit card bills, utility bills, investment account statements, and any other information you can think of.
Most people make monthly budgets so your goal is to figure out how much you make in a month and what your monthly expenses are.
The more detail you can provide, the better your budget will be. -
Step 2: Record your monthly income.
After gathering all of your financial data, separate out your sources of income.
Record the amount of income you bring home in a month.
Be sure to include any side jobs you have.If your income varies from month to month, it may be helpful to figure out your average monthly income for the last six months or so. , Next, look over your financial documents and record any fixed expenses you have, or those that are essential and do not change much from month to month.
Fixed expenses can include things like mortgage payments or rent, credit card payments, car payments, and essential utilities like electric, water, and sewage., You also need to record your variable monthly expenses, which are items for which the amount of money you spend each month varies.
These expenses are not necessarily essential and are likely where you will make adjustments to your spending in your budget.
Variable expenses can include things like groceries, gasoline, gym memberships, and eating out., Once you have recorded all of your income and expenses, both fixed and variable, total each category.
Ultimately, you want your income to be larger than your expenses.
If it is, you can then decide where it is best for you to spend your excess income.
If your expenses are more than your income, you will need to make adjustments to your budget to cut your spending., If your budget shows you are spending more than you are earning in income, look at your variable expenses to find places you can cut back on spending, since these items are usually non-essential.
For example, if you are eating out four nights a week, you may have to cut this back to two nights a week.
This will free up money you can put toward essential expenses like college loans or credit card debt.In addition, you may be paying unnecessary monthly fees, like overdraft or late fees.
If you are spending money on these types of fees, work on making your payments on time and keeping a bit of a cushion in your bank account.Alternatively, you can work on earning more instead of spending less.
Evaluate whether or not you can pick up a few extra hours of work a week, work overtime, or work any side jobs to increase the amount of money you’re bringing in each month., At the end of each month, take some time and review your spending over the past month.
Did you stick to your budget? If not, where did you veer off course? Pinpointing where you are exceeding your budget will help you figure out what kind of spending you need to pay attention to most.
Reviewing your budget can also be encouraging if you find you are sticking to it.
You may find that it’s extremely motivating seeing the amount of money you saved by cutting back the number of days you eat out a week, for example. -
Step 3: List your fixed monthly expenses.
-
Step 4: List your variable monthly expenses.
-
Step 5: Total your monthly income and expenses.
-
Step 6: Adjust your variable expenses to hit your goal.
-
Step 7: Review your budget every month.
Detailed Guide
Creating a budget is one of the most important aspects of personal finance.
A solid budget allows you to plan for how you’ll spend the money you bring in each month and illustrates your spending patterns.
To begin, gather all the financial information you can, including bank statements, pay stubs, credit card bills, utility bills, investment account statements, and any other information you can think of.
Most people make monthly budgets so your goal is to figure out how much you make in a month and what your monthly expenses are.
The more detail you can provide, the better your budget will be.
After gathering all of your financial data, separate out your sources of income.
Record the amount of income you bring home in a month.
Be sure to include any side jobs you have.If your income varies from month to month, it may be helpful to figure out your average monthly income for the last six months or so. , Next, look over your financial documents and record any fixed expenses you have, or those that are essential and do not change much from month to month.
Fixed expenses can include things like mortgage payments or rent, credit card payments, car payments, and essential utilities like electric, water, and sewage., You also need to record your variable monthly expenses, which are items for which the amount of money you spend each month varies.
These expenses are not necessarily essential and are likely where you will make adjustments to your spending in your budget.
Variable expenses can include things like groceries, gasoline, gym memberships, and eating out., Once you have recorded all of your income and expenses, both fixed and variable, total each category.
Ultimately, you want your income to be larger than your expenses.
If it is, you can then decide where it is best for you to spend your excess income.
If your expenses are more than your income, you will need to make adjustments to your budget to cut your spending., If your budget shows you are spending more than you are earning in income, look at your variable expenses to find places you can cut back on spending, since these items are usually non-essential.
For example, if you are eating out four nights a week, you may have to cut this back to two nights a week.
This will free up money you can put toward essential expenses like college loans or credit card debt.In addition, you may be paying unnecessary monthly fees, like overdraft or late fees.
If you are spending money on these types of fees, work on making your payments on time and keeping a bit of a cushion in your bank account.Alternatively, you can work on earning more instead of spending less.
Evaluate whether or not you can pick up a few extra hours of work a week, work overtime, or work any side jobs to increase the amount of money you’re bringing in each month., At the end of each month, take some time and review your spending over the past month.
Did you stick to your budget? If not, where did you veer off course? Pinpointing where you are exceeding your budget will help you figure out what kind of spending you need to pay attention to most.
Reviewing your budget can also be encouraging if you find you are sticking to it.
You may find that it’s extremely motivating seeing the amount of money you saved by cutting back the number of days you eat out a week, for example.
About the Author
Judith Anderson
A passionate writer with expertise in hobbies topics. Loves sharing practical knowledge.
Rate This Guide
How helpful was this guide? Click to rate: