How to make a monthly budget

A recent study from the American Psychological Association revealed that 72 percent of American report feeling stressed about money at least once a month. Excessive stress can lead to health problems, emotional instability and poor decision making. Therefore, it's important to address the stressors in your life so you can focus on what's really important to you.

It's difficult to achieve your goals when all you can think about is money – will there be enough this month? What if you need money in an emergency? Creating a monthly budget that accounts for all of your expenses as well as your future plans will help you de-stress and focus on your life's priorities.

Here are a few ways to develop and stick to your monthly budget.

Why you need a personal budget

A budget is a plan you put in place for determining how to spend – or save – your money. This is especially important for households that only receive income once a month. By planning ahead, you can ensure that you have ample resources for necessities like food, clothing and housing while keeping some money for fun things such as a summer vacation or other trip.

If you don't have a monthly budget, you likely don't have much visibility into how much you spend every month. You may have some idea of how much money you need for recurring bills and rent, but you should really strive to capture all of your expenses in one central location. Thankfully many digital tools exist today that can help you automatically capture expenses and add them to your budget.

Planning for the future is one of the most important reasons for developing an ongoing budget. If you want to make a big purchase, you'll need to save up for it. Learning how to allocate your money and avoid needless expenditures will help you achieve your financial goals faster.

Your budget should capture all income and expenses.

What your budget should include

Before you can set a budget, you need to know exactly how much income you earn every month. For most employed people, this will be a fixed rate. Write down how much you make after taxes have been deducted, then add it to any additional income you might have, such as Social Security checks, income from a second job, etc.

Next, make a master list of your regular monthly expenses. This should include your rent or mortgage payments, utility bills, phone bills, etc. Then, try to estimate how much you spend per month on variable bills – this might include fuel for your car, groceries or entertainment. Try to account for every dollar you spend.

If you tend to use debit and credit cards to pay for your expenses, use a digital tool to automatically track what you spend. For example, Mint.com allows you to connect all of your cards and bank accounts to one profile. You can access reports of every single transaction made over a given period of time, monitor your credit score and see how your budget changes from month to month.

If you tend to use cash for daily expenses, monitor how much you take out of the ATM and keep all of your receipts. The more information you can collect now and on a rolling basis, the more effective your budget will become.

How to break it all down

At this stage, it's a good idea to take a step back and look at the numbers. Are there any surprises? If you haven't been tracking your spending too closely, you may be shocked at how much you spend on things like coffee, entertainment or transportation. Take a look at this example from Business Insider:

A person who buys a cup of coffee for $3.50 every day spends $1,260 annually – or just over $100 a month. If you were to invest that money in a diversified IRA instead with an assumed 6 percent annual return, you would generate $106,000 over 30 years!

In other words, little expenses add up, and there may be better ways to use that money. If you've noticed something surprising on your budget, make a note of it, and look for patterns of behavior that cost you money over time. For instance, if you find yourself browsing online shopping sites when you're bored, learn to notice that behavior and make a change.

For you budget to be effective, you need more money coming in than going out. For many Americans, this is a challenge. Rent increases and cost of living can make it difficult to stay afloat, even when you have steady income.

Subtract your total monthly expenses from your total monthly income. If the result is a positive number, you're on the right track. If it's negative, you need to work to make your budget better. As you make adjustments to your spending habits, return to these calculations to ensure you're making progress.

Planning for big expenses

One of the primary advantages of a monthly budget is that it allows you to effectively plan for the future. If you don't have an emergency fund, consider starting one today. Keeping an emergency fund of one to three months of expenses will help a lot if you lose your income.

Once you have an emergency fund, you can focus on other financial goals such as planning for retirement. CNN Money recommended opening an IRA or Roth IRA and contributing the maximum amount every year.

For big life expenses such as weddings, new vehicles or new housing, you'll need to set savings goals. These should come out of your monthly income only after you've paid your monthly debts. Create a savings plan by taking the total cost of the expense and dividing by the number of months you want to save for. So, if you need $5,000 for a vacation and you want to take the trip one year from now, you'll need to save an average of $416 per month.

The post How to make a monthly budget appeared first on Corvias Military Living Blog.