Money isn’t impossible to find, but at times it can seem impossible to hold onto. It becomes a struggle between saving for the future and instant gratification. Indulging in whims, of course, can lead to overspending, too much debt, angry creditors, and eventually bankruptcy. So, it's important to think about a budget. This is a tool that can help you keep you finances in order, your credit cards from maxing out, and your house in your own possession. Budgets are important for organizing your financial life: how much you spend, what you spend it on, and when you spend it.
Steps to creating a budget
Gather information - Compile all financial statements, bank statements, investment accounts, recent bills, and general receipts, information on any other income or expenses.
Make long term goals - Want to buy a house in 3 years, or fund your child's education when he goes to college in 5 years? Calculate how much you will need for each of these big expenses, and divide that amount by the number of months you have until you need it. Then you can add these "payments" in to your budget each month, and it will be easier to produce the large sum at the end.
Monthly Income - Gather information on your income, including pay stubs listing the take home pay amount, invoice records for those who are self employed, and any other income sources. Tally this as a monthly income amount.
Monthly Expenses - Gather information on your expenses. These include set payments on cars, mortgages, long term goal payments, insurance (auto, home, health, life), groceries, and utilities, as well as expenses for entertainment, dry cleaning, shopping, and travel. Also include any monthly contributions to retirement or college savings accounts. Tally this as a monthly expense amount.
Decide what monthly expenses are variable, and which ones are fixed - Those that are set in stone may include car/mortgage payments, utilities, insurance, TV/internet bills, etc. Those that vary from month to month may include groceries, travel, shopping, gasoline, dry cleaning, entertainment, dining out, and gifts. This distinction is important to cutting down your budget.
Expenses Vs. Income - Now look back at your two tallies from steps (3) and (4). If expenses are less than income, skip down to step (8). If expenses are greater than income, you will need to make adjustments to your variable expenditures.
Making adjustments - To equalize your income and expense columns, target variable expense areas to minimize. For instance, if your shopping bill is twice the amount of your grocery bill, reevaluate how much you really need those new pink pumps, or if one sweater might do instead of five. Beware of buying luxuries as necessities. For more tips on cutting spending, see our Tips on Spending Less article.
Allocating Excess Income - If your income is greater than your expenses, or you have managed to reduce some of your variable expenses, decide where to allocate that extra savings. Retirement and college accounts are great choices, as are savings accounts to buy a house if you do not already own one. Allocating these savings will help to keep you on track, and reduce the likelihood of those savings going straight back to variable, and unnecessary, expenses such as shopping sprees.
Review monthly - Make sure to reevaluate your budget each month. Include new expenses or changed bill amounts, and rebalance the income-expense accounts. Review how your goal savings are coming along. Allocate new income to long term savings plans, or apportion it out to areas you may have scrimped on before. Eating TV dinners every night to save on groceries? Add it to your grocery account.
Budget Items
A budget has many different parts, all of which are customizable to each individual's own needs and interests. A few of the common budget items include:
Mortgage Payments - A consumer who owns a home and owes money on a mortgage should make mortgage payments a priority in order to avoid default, avoid foreclosure, and keep that house.
Car Payments - Like mortgages, car payments should also be budgeted in to avoid repossession of the car.
Insurance Payments - Home, Auto, and Health insurance are important to have, as uninsured accidents or incidents can have an even greater impact on your budget than simple monthly payments
Taxes - Though some of these come only once a year, it is important to save for these throughout the year to reduce the impact of producing such funds all at once. Set aside a twelfth of the needed amounts each month in a separate fund to save until the taxes come due. Some examples include property taxes and income taxes.
Utilities / Cable / Internet - Electric, water, garbage, and gas are only a few of the many utilities that you will need to pay. Don't leave them out - they're hard to live without.
Groceries - You need to eat to live, so budget enough so you can stock up on food!
Education Planning - If you have a child of any age, or are planning on going back to school, start saving now. See our Educational Finances section for more details on ways to save.
Retirement Planning - Add money to your 401K or IRA account each month to save up for the day you stop working, and boost your standard of living in retirement.
Entertainment & Travel - It's nice to enjoy some of your hard earned money while you earn it, so save a little for going to the movies, amusement parks, and family vacations.
Shopping - Though this is by far one of the most variable categories, it is important to budget in a set (but limited) amount of money for shopping. This will reduce the risk of reaching spending from other accounts to satisfy that shopping craving.
Sample:
Here's a of a budget for a couple with a house, a car, and one child:
Item
Income Amount
Expense Amount
One Partner's Income
$2,000
Second Partner's Income
$1,500
Investment Income
$500
Mortgage
$950
Car
$600
Insurance - Auto
$150
Insurance - Life
$60
Insurance - Home
$100
Education Savings
$200
Retirement Savings
$215
Phone
$75
Utilities - Gas/Water/Electric
$125
Groceries
$250
Entertainment
$250
Gasoline
$150
So, this family has a net income of $875. They can then use this for emergency expenses, or if it goes unused, to retirement or educational savings.
Tips and Tricks:
Using software can help lessen the headache, and keep you honest - Microsoft Money and Quicken are just two of the programs available to help you keep track of personal finances and stick to a budget.
Watch your ATM withdrawals - Just because you paid with cash does not mean that it can be excluded from your budget. Keeping tabs on all forms of spending (credit card, payments, and cash) will help you stick to your budget.
Limit Yourself - Set a goal of spending no more then 90% of your income. This will give you a cushion to fall back on, and some long term goal savings funding.
Keep track of Credit Cards - These small plastic items can be the most detrimental to your budget, as they are easy, convenient, and require no upfront cash.
