A budget is a
great way to take control of your finances and save for some goal or maybe just
get out of debt.
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. 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).
11. 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
·
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!
·
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.
·
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.
·
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.
·
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!
·
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.
·
Don't try and 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.