A personal or household budget is an itemized summary of expected income and expenses for a defined period of time, most frequently one month. While the word budget has negatively become synonymous with restricted spending just asdiet has become synonymous with restricted eating, a budget should really mean more efficient spending. A budget will show you how much money you expect to bring in against all of your expenditures from the required expenses like house payments and rent to discretionary spending like entertainment.
Instead of viewing a budget as a negative, view it as tool for achieving your financial goals.
What a Budget Does
As a personal financial planning tool, a written, monthly budget allows you to plan for how you will spend and/or save your money each month and also to keep track of your spending patterns.
Though making a budget may not sound like the most exciting activity (and for some it is downright scary), it is vital to keeping your financial house in order as budgets rely on balance. If you spend less in one area, you can spend more in another or choose to save that money for a larger future purchase, building a “rainy day” fund, or even for retirement.
Before you begin to make your budget, it is important to realize that in order to be successful you have to provide as much detailed and accurate information as possible. Ultimately, the end result of your new budget will show you where your money is coming from, how much is there, and where it is all going each month. With a budget, you can begin to prioritize your spending and better manage your money and financial future.
How to Make a Budget
The following is a step-by-step guide to making an accurate and helpful personal budget.
- Gather every financial statement you can. This includes bank statements, investment accounts, recent utility bills, and any information regarding a source of income or expense. One of the keys in the budget-making process is to create a monthly average, so the more information you can dig up the better.
- Record all of your sources of income. If you are self-employed or have any outside sources of income, be sure to record these as well. If your income is in the form of aregular paycheck where taxes are automatically deducted then using the net income, or take home pay, amount is fine. Record this total income as a monthly amount.
- Create a list of monthly expenses. Write down a list of all the expected expenses you plan on incurring over the course of a month. This includes a mortgage payment, car payments, auto insurance, groceries, utilities, entertainment, dry cleaning, student loans, retirement or college savings — essentially everything you spend money on.
- Break expenses into two categories: fixed and variable. Fixed expenses are those that stay relatively the same each month and are required parts of your way of living. They included expenses such as your mortgage or rent, car payments, cable and/or internet service, trash pickup, credit card payments and so on. These expenses for the most part are essential yet not likely to change in the budget. Variable expenses are the type that will change from month to month and include items such as groceries, gasoline, entertainment, eating out, and gifts, to name a few. This category will be important when making adjustments.
- Total your monthly income and monthly expenses. If your end result shows more income than expenses, you are off to a good start. This means you can prioritize this excess to areas of your budget such as retirement savings or paying more on credit card balances to eliminate that debt faster. If you are showing a higher expense column than income it means some changes will have to be made.
- Make adjustments to expenses. If you have accurately identified and listed all of your expenses, the ultimate goal would be to have your income and expense columns to be equal. This means all of your income is accounted for and budgeted for a specific expense or savings goal.If you are in a situation where expenses are higher than income, you should look at your variable expenses to find areas to cut. Since these expenses are typically nonessential, it should be easy to shave a few dollars in a few areas to bring you closer to your income.
Review your budget monthly. It is important to review your budget on a regular basis to make sure you are staying on track. After the first month take a minute to sit down and compare the actual expenses versus what you had created in the budget. This will show you where you did well and where you may need to improve.