Good money management keeps you on track to reach your goals, and you can start by creating a budget that works for you.
Most people plan their spending on a monthly basis since bills are usually due every month. Here are the steps you can follow when setting your own monthly budget:
1. Start with income
A good budget allows you to live below your means so that you have enough money for savings and investments.
To keep from spending more than you earn, you should know how much you get paid every month. Calculate your net income, or your “take-home pay” after deducting taxes and contributions.
Add up your earnings from all sources of recurring income, including side jobs or freelance work. If some payments vary per month, you can take what you realistically earn in a year and divide it by 12 to get your monthly average.
2. Set a strategy
Since you’re starting from scratch, you can explore popular budgeting methods to find an approach that fits you best. Here are some examples:
- 50/30/20
The 50/30/20 budgeting method is a guideline for how to divide your income. You’ll split money into 3 major categories: 50% for needs, 30% for wants, and 20% for savings and investments.
If you have debt, it’s ideal to put the rest of your income towards repayment after setting aside 50% for needs. Once the debt is manageable, you can consider including wants and savings/investments in the allocation.
- Zero-based budgeting
You can follow this strategy if you’d like to be as detailed as possible. It involves creating a spending plan where every single peso you earn has a purpose. Your income minus your expenses should equal zero.
However, this doesn’t mean you should spend all your money on purchases. Your plan should include savings, debt payments, and investments.
- “Pay yourself first”
This mentality is about putting savings ahead of spending. You’ll set aside money for savings and investments first before planning for any expenses.
Doing so encourages you to prioritize your money goals instead of treating them as an afterthought.
3. Identify your expenses
Once you know your income and have an overall strategy in mind, you can start allocating money to specific expense categories.
It helps a lot if you’re already tracking your expenses since you can use your spending history as a guide for future allocations. You can also use the data to find areas where you can cut back if you want to save more money.
If you aren’t tracking your spending yet, it’s best to start as soon as possible. For now, you can estimate how much to allocate for each category based on your lifestyle and goals.
Do the following:
- List your needs and wants
Below are some examples of items you can budget for. You can add or remove categories depending on which ones are relevant to your situation.
| Needs | Wants |
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When money is tight, remember to focus on what matters most. You may need to cut out wants until you’re earning enough to cover discretionary spending without sacrificing savings and investments.
- Identify fixed vs. variable costs
Fixed costs are predictable and stay the same every time, like your rent and internet bill. Variable costs, on the other hand, change from month to month or happen irregularly.
To budget for variable costs, you can calculate an average monthly amount. You can also set a spending limit if the amount is within your control, like money for groceries and clothing.
4. Plan for savings and investments
Setting aside money for the future is always important, no matter how small the amount you’ll start with. You may need the following:
- Emergency fund
An emergency fund is money saved for unexpected events, like medical bills, car repairs, and job loss. A good rule of thumb is to save at least 3 to 6 months’ worth of essential expenses.
- Investments
Investing gives your money a better potential to grow than it would in a savings account. This can help you beat inflation and achieve milestones, such as building a retirement fund or buying a house.
You can start investing once you have enough money in your emergency fund and your debt is at a manageable level.
- Sinking funds
Some costs are irregular but expected, like home improvements, travel, and celebrations. You can set up sinking funds for these near-term goals so you can save and invest for them over time instead of making a large 1-time payment.
5. Stay consistent
A budget only works if you stick with it, review it periodically, and make changes if you need to. Remember to keep doing the following:
- Track your spending
Continue tracking your spending so you know exactly where your money goes. Your tracker can show whether you stayed within budget or if you have leftover money you can use next month or add to savings and investments.
- Adjust as needed
Life changes, and your budget should too. You can increase or reduce allocations when needed or try to save and invest more as you start earning more.
