Create a Working Budget
A budget is a great way to take control of your finances and save for some goal or maybe just get out of debt.
Contents
Steps
Budgeting Help
Doc:List of Expenses,Low Income Budget,High Income Budget,Family Budget,Club Budget,Budget Tips and Tricks
Creating a Working Budget
- Calculate how much money you earn in a month after taxes. For this budget plan, use your net pay or take home pay. Include tips, supplementary income, side-jobs, investments etc. This is your income.
- Calculate your expenses. Save receipts for a couple of weeks or a month. Knowing your monthly expenditure on groceries or gas (for example) makes the next step much easier. If you want to start writing your budget today, and don't have receipts, it is possible, just slightly more difficult.
- Set your goal. Defining a goal makes it easier to stick to your budget, and gives you a way of measuring your success or failure in meeting it. Why are you going on a budget? Maybe you want to start saving for college, or maybe you want to get out of debt.
- Divide your budget into basic categories. For example: Housing, Food, Auto, Entertainment, Savings, Clothing, Medical, and Miscellaneous. You could also organize your expenses into needs - such as your loan and electricity - and wants - such as clothing and entertainment.
- List all your spending for each category. Let's take Auto as an example: $300/month car payment, $100/month insurance, $250/month on gas, $50/month on maintenance, 10$/month on fees such as registration. So, your total Auto budget for the month would be $710/month. If you don't know the exact amounts you spend, make good estimates. The more accurate you are, the more likely you are to keep to your budget plan.
- Add up all your spending by categories. This should show your total monthly spending. Compare it to how much you make each month after taxes.
- Decide on a method to keep track of your budget. You can use a good old-fashioned ledger book, available from a general shopping center for about $5. Some people prefer to use computer programs like Quicken or Microsoft Money.
- Set up your ledger. Leave the first 5-odd pages blank, we'll come back to them later. Divide the rest of the ledger into as many sections as you have main categories. Put each main category on the first page of each section. This will give you room for lots of entries in each category. Multiple transaction categories, like food, are going to need lots of pages.
- Decide how long your budget plan must last. I found monthly to be the most useful for me, since most bills are monthly. However, I decided to make the deposits to my budget categories twice a month. In other words, if my Auto budget for the month is $710, I showed "deposits" of $355 in the Auto section on the 1st and 15th of each month.
- Show a deposit in each category at the start of each period, then show all the expenditures from that category throughout the period. So, for Auto, you would start off with $710 for the month, then show several expenditures for gas, one expenditure for car payment, maybe one expenditure for insurance(depending on whether you pay insurance monthly or not).
- Use that first section of the ledger book to record income and then show the budget being subtracted from it each period. For instance, I get paid every other Friday, so there are corresponding entries in the income section showing income deposits every other Friday. My budget is $2,800/month, and gets subtracted on the 1st and 15th. So on each 1st and 15th, the income sections shows a budget subtraction of $1,400.
Tips
- As time goes by, you will find that your original budget has some flaws. Some areas you underestimated, some areas you overestimated. Some things come up that you didn't account for at all. That's OK! Just make revisions as you get a clearer picture of your spending. Remember to keep your overall spending less than your earning so you can meet your goal.
- Another common problem is people see the shiny new must-have item at (insert store here) and they buy it, even though it's not on their budget. Maybe it was on sale and they couldn't pass it up! This is why it's good to have a budget category called "Blow" (or whatever you want.) No, it's not for cocaine, it's the category for impulse purchases! I highly recommend including this category.
- Cut out bad habits. Smoking and drinking and excessive dining out are costly. Likewise, excessive hobby habits and travel need to be managed like an emotionally mature adult where providing for the family unit comes first and foremost.
- There are occasional pay-periods where you may make some extra money, and when that happens there is a surplus! It's up to you on how to use that surplus. You could put it directly toward your goal, or you could let it sit in your bank account as an emergency fund.
- The very first month you set up a budget, it's probably not going to work for you, because if you've never kept track of this stuff before, you're not going to magically know how much to put in each category. DON'T BE DISCOURAGED. The second month might be a little better, but most people don't have a good, working budget until the third or fourth month. You didn't ride a bike without training wheels the first time you tried, and you weren't Michael Schumacher the first time you got in a car, either. Practice makes perfect!
- A common problem people have when making budgets is that they'll come up with an excellent plan, but then the car breaks down and the plan goes out the window. This is why you have the above-mentioned emergency fund. If you use the emergency fund money for an emergency, don't forget to budget for putting that money back next month!
- The first time I tried this, my spending was more than my earning, and that was without putting anything into savings! If that happens to you, do what I did: start making cuts in your spending plan. For instance, my first budget had $150/month for clothing. After making changes, I reduced my spending to $80/month for clothing. You might have to make many changes like that to be able to accomplish whatever goals you have set for your budget.
- If you keep your emergency fund in your checking (or savings!) account, it could be very difficult to avoid the temptation to spend it when you see that shiny new must-have item you've been wanting. Find a money-market account with a decent rate of return (4-5%) and check-writing privileges and you'll be ahead of the game.
- Calculate on how much you are spending in gas. If you are spending $60 a week in gas then try doing something else. Save money on gas by taking the bus or riding a bike. Riding a bike is very good on saving gas and its exercise. Some buses have added features where they allow passengers to place their bikes so, you can ride your bike and take the bus at the same time which is great.
- Don't try to begin a budget for the first month after an event in your life where money was significantly spent or saved, such as a vacation or a move, or coming into an inheritance or winning the lottery. Wait until your finances have been "in order" or at a steady pace, usually from three to six months afterwards, before starting fresh.
Warnings
- At times a budget can seem very restrictive. Just remember, it can be liberating too! When vacation time comes, you'll already have money set aside for it thanks to your budget and you won't have to scrape to be able to afford it.
