What Is A Monthly Budget?

What is a Monthly BudgetOne of the questions I hear sometimes is, “What is a monthly budget?”  I’m always surprised at this but I can understand where the question comes from.

A budget is simply a tool that you can use to help you apply financial discipline (more on discipline as it relates to finances below).  In reality, it’s just a list that identifies your (self-imposed) spending limits on categories of expenses (that you determine) over a given length of time.

The length of time over which you develop your budget is called a budget cycle.  Your spending limits are developed with the knowledge of your expected income and your life goals and plans, which can introduce budget categories like “savings” and “401k”, etc..

The ability to establish and stick to a budget is essential for anyone on a limited income to reach retirement in a manner (and on a schedule) that he or she desires.  This is the first of a couple of posts I will provide on the important topic of budgeting for personal financial freedom.

Why Budget Monthly?

A monthly budget is simply a budget that identifies your spending limits over a months’ time.  This is probably the single most useful budget to create and live by (yes, once you see the results, you may want to develop more than one budget!).

The reason for this is that most of us receive our income (i.e., paychecks) either once or twice a month, and most of our regular bill payments are made monthly.  This makes monitoring things against your budget easier.  And, in our minds we tend to naturally compare our last-month’s paychecks and what we were billed for that expense last month to what we just got paid/billed this month.  So it is probably easiest to develop a budget on a monthly cycle.

Applying Discipline to Your Financial Life

In this busy world we all live in it is easy just to get lost in what we are involved in and forget about the things we have been taught that make our lives easier – one of those being DISCIPLINE.  Regular use of discipline regarding your money is crucial to meeting your retirement goals, whatever they are.

It can be a satisfying feeling to actually put your finances on a track to wellness, and part of that is applying a measure of financial discipline to your life.  Financial discipline involves regular attention to the details of your finances, including putting effort into planning, an essential first step.

Many (if not most) people don’t have plans or goals for their financial future, and so don’t ever bother to monitor what is happening with their money.  And of course, if you don’t monitor and actively manage your money, the world will do it for you – most likely, you will fall into the trap of consumption, failure to save, and eventually (if you really ignore things) financial ruin.

Of course, putting limits on your spending is challenging.  Who wants to do that – NO ONE!  Especially that first time you actually try to do it!  But, as you do it, it gets easier.  Ideally, the budget should be used regularly by you, over each successive budget cycle, so that you develop habits that preserve your hard-earned money without so much effort.  And developing good spending habits is the whole point of using a budget – learning how to be disciplined with your money.

What About Income and Expenses That Don’t Occur Monthly?

There are other income items we receive and payments we make on either shorter or longer time frames than monthly (for example..quarterly, yearly, etc.).  More frequent, regular income and expenses can be worked into your monthly budget pretty easily – for example, if you pay for something weekly, you can simply multiply your average weekly payment by the number of weeks in the average month (a little over 4) and use that as your monthly budget line-item spending limit.

However, there may be some expenses that are harder to work into a monthly budget, either because they occur irregularly or have amounts that fluctuate.  Sometimes these expenses are pretty big ones, too, like quarterly or annual tax bills, insurance bills, and the like.  In these cases, using another budget cycle for these may make sense, so you can track and average them.

Regardless of your choice for your primary budget cycle (monthly, for example), it should be the “controlling” cycle, because it is here that you should include categories as necessary to put back money to cover these in the future.  Then, when those bills come in you will have the satisfaction of having ready money available to pay them, instead of that horrible “surprised” feeling, regret over whatever it was that you splurged on this week, etc.

In my budgeting I include these non-monthly items in the budget under a separate “irregular” income and expenses grouping.  This for me is a fairly lengthy list of items, but they are all represented in “monthly” amounts (i.e., if the expense is quarterly, then I represent it in my budget by taking amount that I’m assuming on average for them, divided by 3 months to get the monthly amount).  This gives me the amount per month that I need to reserve in my checking account (or in another cash account) that I can then draw on to pay that bill in full when it comes due.

Tracking Your Income and Expenses

The best way to build a budget is to find out what you are currently spending your money on, put it down in writing in front of your eyes so that you can make some conscious decisions about changes that may need to be made.  I have written about this in the past, but it bears repeating here, as this is a must for developing a budget.  If you aren’t paying attention to how you spend your money you can’t get control of it – you will spend it (which is a problem, unless you make far more than you can spend, and few of us have that problem!).

The results can be surprising – “Do I really spend that much money every month on that?”, “I had no idea my account was being charged so much for this every month without my knowledge!”, etc..  Of course, you may also determine that you aren’t saving enough money, or spending enough money in a certain area, based on your stated life goals.

If you aren’t already, I recommend that you start using personal finance software to help you with tracking your income and expenses regularly.  This does take effort, but the benefits are enormous.  I’m actually not sure how you can do a thorough enough job of this without using some type of transaction register software program.  In a future post I will provide a review of several of the most popular programs, but for now I can tell you that I use the most popular one, Quicken.

Most banks now allow you to download your transactions directly into the software, where it automatically categorizes each one according to previous similar transactions.  Then, the only step necessary is cleanup – which is necessary for new transactions, and many transactions where the “previous transaction” algorithm doesn’t supply the right category.  Also, you will want to add notes that describe what exactly the transaction was for (for history purposes – you would be surprised how handy this is).

If you haven’t already, please check out my Understanding Your Current Financial Situation and Personal Spending Tracking pages.

Take the Time To Do This Right

If you are going to go to the trouble to develop a personal budget (and I recommend that you do), then by all means, TAKE THE TIME NECESSARY TO DO THIS RIGHT – your spending patterns should be dictated by your life plan and goals, which you have thoughtfully developed in advance.  If you jump into budgeting without these things already done, you are starting in the middle.

My future posts on this topic will assume that you have gotten a handle on your current spending and its alignment (for good or bad) with your well-developed financial goals and plans to meet them.

Don’t get me wrong – anything you do to apply discipline to control your spending will help you in your financial journey to retirement.  But you need to have some order about how you go about this – don’t just start in the middle and expect great results.  Great results come from deliberate and thoughtful preparation, and that will take some time and effort (although less than you might expect).

Again, if you haven’t already, please see my Best Retirement Advice page for making a retirement (“life”) plan.  If you need to go back to set your life goals, see my Retirement Goal Setting page.

Then, if you haven’t already, please check out my Understanding Your Financial Situation and Personal Spending Tracking  pages.

In my next post, I’ll address how to develop a personal budget.

Comments?

Let me know what you think.  Post a comment below – I’ll respond!  Or, check out my Wealthy Affiliate profile page and leave me a comment there.

Randy

10 Comments:

  1. A monthly budget is really vital in tracking the flow of our money. My bad habit was I just spend as long as I have positive in my account. I learnt it the hard way as it leaves me almost in financial ruin. I think it’s good advice here about keeping a monthly budget. It all comes down to discipline when enforcing it.

    • You have it exactly right Kenny, and I’ve been there too. It really is about discipline, which in turn is knowing deep down what is really important to you, this bright shiny thing in front of me begging me to buy it, or Retirement Goal Setting and said this is what I really want for my future and my families future. Thanks for the comments!

  2. Hello Rdbest,

    First of all the topic, you brought up is very, very important in our daily lives. I like the fact that you explained the meaning of budget so that we are able to understand clearly without question marks.

    We spend money every day, and most of the people they do not try to record or write down everything they buy.
    Thank you for the informative information.

    • When people think “budget” I think it goes in one ear and out the other – it means putting limits on myself and “well, just not today”. This is where we fail because today becomes tomorrow, and then all of next week, and then before you know it we come close to retirement with nothing much saved for it. A budget is this important tool for getting control of their spending and their lives, really. My intent here is to wake people up as soon as possible to see that they really can do this to help secure their future years!

      Thanks for the comments, all the best to you!

  3. Great information on having a monthly budget. Having a limited budget to spend can be a challenge because things can cost very expensive when you add all the expenses together. Good tip on planning ahead each month to prevent spending too much. I initially spent more on bills than I expected and I have since learned to plan my budget more wisely. Proper planning could help us save more for retirement.

    • Yes planning is so essential to financial freedom. When we don’t plan our lives remain in a fog of uncertainty (that is much larger than it should be) and we will get surprised negatively much more often. Thank you for the comments Felicity!

  4. Thanks for the explanation! I’m glad you put everything in simple-to-understand words and simple, short sentences so I can understand every element of monthly budgeting. It’s important to keep all this stuff in mind, so I bet I’ll be hearing about this all again. You wrote a whole lot and it really helped out.

    • Thank you for the comments! Yes nothing here is too difficult to understand, but getting started with it is the hard part. Putting some effort though is often just what is needed to get the concepts stuck in our heads though. Thanks again and best of everything to you!

  5. I believe leaning about what a monthly budget is, should be something everyone should do early in life. This will help them in the future as they prepare for retirement. It is sometimes difficult to understand those little things we do today can have a huge impact on our lives in the future. Building and sticking to a monthly budget is just one of those things.
    Thanks for the great write up/
    Marc

    • Thanks for the great comments Marc. I am glad you picked up the main point of my post (and really, my whole website!), to get started now getting control of your money and allow it to work for you – pretty sure we all would like to retire in comfort (or even early) and budgeting is a great tool to help get you there.

      Randy

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