Depending on how disciplined you are, a budget may not be essential to keeping your finances under control, but it does allow you to make calculated decisions about how to spend your income. Many competent household CEOs create and use a budget to not only control spending, but also help them save for retirement, emergencies, vacations and other big-ticket purchases.
To begin the actual task of establishing your budget you’ll need to establish your income and outgo. So the first step is to collect your bills and income records.
Let’s now let’s get you on the road to financial freedom by going through the budget creation process step by step:
- Break-out and record your monthly net income. Remember, as part of your monthly net income, one item you will be recording is your net monthly paycheck total after tax withholding and other deductions are made. These “other deductions” could include 401(k) or other retirement deductions, health benefit deductions, garnishments, etc. There is no need to over-think this entry. Simply put, your net paycheck is the amount of your check, or the amount automatically deposited into your bank account every pay period. Identify any other sources of income, and then record the data. I prefer to use a spreadsheet, but there are other options including online budget tools, and even good a old-fashioned paper and pencil.
- Break-out and record your periodic expenses. These are costs that only come up once or twice per year, as opposed to monthly. Good examples of periodic expenses include auto maintenance, and tires for the car. Also school costs such as tuition and books, homeowner’s insurance and property taxes. Keep in mind that many people pay their homeowner’s insurance and property taxes on a monthly basis as part of their overall mortgage payment. If that is the case with you, do not include those payments as a monthly expense!
- Total up your expenses. When you’re finished entering your expenses total them up and then divide the amount by 12 to get a total monthly average.
- Record the rest of your expenses and categorize everything as a want or need. Based upon the receipts, checkbook register and other data you collected earlier, total up your monthly expenses on a worksheet. You’ll need to determine which of those expense items are necessities (needs) and which are discretionary (wants). For example, for most people, the rent/mortgage, electricity, sewer, and groceries are necessities, while car washes and restaurants are discretionary. In some cases, an item may be partly a “want” and partly a “need.” After you’re finished, add up your expenses in both categories (wants and needs).
- Compare your income and expenses. If your monthly expenses exceed your net income, then your household is spending beyond its means. Remember, your goal is to create a budget that ensures your outgo doesn’t exceed your income. Take a look at all of the items in your “wants” category. Those are the items where you will need to cut back on your spending in order to balance your books.
Although preparing and tracking a family budget requires simple math skills, it’s natural to be uncomfortable with the process. If you lack the skills — or simply would prefer a little help — contact a friend or a personal finance professional.
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