A personal or household budget is a summary that compares and tracks your income and expenses for a defined period, typically one month. While the word “budget” is often associated with restricted spending, a budget does not have to be restrictive. It just has to be effective.
If you want to control your spending and work towards your financial goals, you need a budget. Below are simple steps to help create a budget:
1. Gather Your Financial Paperwork:
Before you begin, gather up all your financial statements, including: bank statement, Investment accounts, recent utility bills, credit card bills, receipts from the last three months, mortgage or auto loan statements. This is because, it is necessary to have access to any information about your income and expenses. The more information you can dig up, the better.
2. Calculate Your Income:
How much income do you expect each month? If your income is in the form of a regular paycheck where taxes are automatically deducted, then using the net income (or take-home pay) amount is fine. If you are self-employed or have outside sources of income, such as child support or Social Security, include them as well. Then record the total income as a monthly amount.
If you have a variable income (for example, from a seasonal or freelance job), consider using the income from your lowest-earning month in the past year as your baseline income when setting up your budget.
3. Create a List of Monthly Expenses:
Write down a list of all the expenses you expect to have during a month. This list could include: Mortgage payments or rent, insurance, groceries, utilities, entertainment, personal care, eating out, childcare, transportation costs, travels, student loans, savings, etc.
You can use your bank statements, receipts, and credit card statements from the last three months to identify all your spending.
4. Determine Fixed and Variable Expenses:
Fixed expenses are those mandatory expenses that you pay the same amount for each time. They include items like mortgage or rent payments, car payments, set-fee internet service, trash pickup, and regular childcare. If you pay a standard credit card payment, include that amount and any other essential spending that tends to stay the same from month to month.
Variable expenses represent those daily spending decisions like eating at restaurants, buying clothes, hanging out with your girlfriends. They are “variable” because the amount that you spend differs from month-to-month.
5. Total Your Monthly Income and Expenses
If your income is higher than your expenses, you are off to a good start. The extra money means you can put funds towards other areas of your budget, such as retirement savings or paying off debt. However, If your expenses are more than your income, that means you are overspending and need to make some changes.
6. Make Adjustments to Expenses:
If you’re in a situation where your expenses are higher than income, then it is good to find areas in your variable expenses that you can cut. Look for places you can reduce your spending, like eating out less.
However, if your expenses are far above your income, or you have significant debt, reducing your variable expenses may not be enough. You may need to trim your fixed expenses and increase your income to balance your budget.
7. Aim to have your income and expense figure equal:
This equal balance means all of your income is accounted for and budgeted toward a specific expense or savings goal.
Please note: A budget only works if you are honest about both your income and expenses. To make an effective budget, you must be willing to work with detailed and accurate information about your earning and spending habits.
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