Tuesday, January 8, 2013

How To Make A Budget

 Do you have a budget? If you don't, what's keeping you from budgeting? Too much work, too
complicated, too time consuming?

There are lots of reasons to not budget, but here's my reason for budgeting. Freedom. Yes, I feel free when I budget because know exactly how much I can spend on fun things and take comforting in knowing that I will still have enough to cover all of my bills?

I think budgeting should be simple. I think budgets work best when you budget for one month at a time. Since I like lists, here is how to budget in list form. (For this example I'm going to say we are budgeting for the month of February.)

1. Grab a piece of paper and a pencil (I like pencil because I erase and move things around a lot.) At the top of the page write down all of your expected sources of income for February, including but not limited to; your job, babysitting the kids down the street, overtime hours, house sitting for your uncle, etc. Then total up your expected income, this is everything you can spend or save in the month of February.

2. Next write down your family financial goal. If you want to save $200 a month, write that down as your first "expense" in your budget.

3. Write down all of your other expected expenses for the month of February. Start with the needs like rent/mortgage, utilities, food, transportation, insurance, drivers license renewing fee, childcare, etc. Then move on to the want categories such as entertainment, clothing (as in more than basic clothing needs), expensive haircuts, a gift for your nephew, etc. Total all of your outgoing funds, including the amount going to your family financial goal. (Even if you're putting it in savings, consider it a outgoing fund, so it is accounted for and you cannot spend it on anything else.)

4. Take your total income and subtract it from your total out go. Do you come up with zero? Are you over budget? Are you under budget? Make necessary adjustments so that your income and your outgo are equal. If your outgo is more than your income; start by taking funds away from that "wants" categories. Only take away from the family financial goal category if you really have to. If things are really out of whack you might have to make some big changes to get things back under control. Evey situation is different, you have to do what is best for you. Hopefully writing out a budget it eye opening if you are habitually spending more than you make each month.

5. Write out your final budget and if you are married make sure to talk about the budget with your spouse so you are both on the same page.

6. Match your paydays to you spending. For example, if you are in a two income household and each person makes $1,000 a paycheck and gets paid twice a month (the same two days.) Then you have two paydays in your house worth $2,000 each. You can diving your spending one of two ways. First, you can divide all of your outgo in half and take one half out of each payday For example, your rent/mortgage is $900 a month so each payday you set aside $450 for your rent/mortgage. When you pay the bill once a month you'll have the full $900 available. The second way is to set aside whole spending amounts at a time. For example, your rent/mortgage is $900 a month so the first payday you are going to set aside $900 of your $2,000 total payday for rent/mortgage. It's set aside, (as in it's just waiting in your checking account) for when the time comes to pay your bill. On your second payday of the month you will not set aside anything for your rent/mortgage because you have already taken care of the full amount from you first payday.

That's it! Now you have a budget and you have divided your spending to reflect your income. The only thing left to do is live out your budget.

I will be talking about tracking your expenses a little later. Tracking expenses is especially helpful for budget categories used more frequently during the month such as food and entertainment.

Remember your budget categories are personal, it's up to you and your spouse (if you're married) to decide what categories are appropriate. I personally feel that having less budget categories is better. My family has recently combined all of our "wants" categories into one. We call it "other" (I'm taking suggestions for better a name.) When all of our wants were divided into many categories such as entertainment, clothes, gifts, etc. It felt too restrictive for us. For example we would budget to spend $25 a month in entertainment but if we wanted to see a concert that month and it was more expensive than $25 we didn't go. Which felt silly to me if we had another $25 going toward clothing that month but we didn't need new clothes. Instead we have one bigger category and we work together on what we spend it on.

The most important thing to remember is family financial management is personal, you have to find what works best for you.

Have questions or need clarification? Please feel free to ask  general questions in the comments.

Note: I am not a financial expert, I am only sharing what works for me and hoping it can benefit at least one person out there.

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