Person Not On Budget Doe
Thomas Merino
Your success with budgeting may depend on your perspective. Some think budgets are meant to be restrictive, take the fun out of life, and make you feel shameful about spending. Others may view budgets as too time consuming to make or too difficult to follow.
In reality, budgeting is an empowering process. It puts you in control of directing your money towards what you really want in life, including having fun. With this in mind, taking the time to create a realistic budget you can follow will be well worth it.
List your sources of income and how much you expect to receive on a monthly basis. Income sources may include your paychecks, child support, pay from gig work, Social Security income, etc. If your paycheck amounts differ each period, estimate conservatively to set yourself up for success. Let's use an example:
What do you spend your money on? Start by estimating your fixed expenses, which are those that are the same amount each month. Your rent or mortgage, cell phone bill, and garbage bill may be examples of fixed expenses. List each expense and how much it costs. Next, identify your variable expenses, which are those with different dollar amounts each month. Groceries, eating out, gifts, clothes, and gas are examples of these types of expenses. Estimate how much you spend on these each month. Looking at past credit card or bank statements can help you to accurately estimate amounts. Don't forget to budget for expenses you may pay annually. To budget for these, divide the expense by 12, then put aside that amount each month. When finished, calculate your total estimated monthly expenses. See the example below.
Now, compare your total estimated income to your total estimated expenses. If your expected monthly income is greater than your expected monthly expenses, you expect a surplus. That's great! In the example above, the person expects to receive $3,000 and spend $2,700 each month. There is an expected surplus of $300 per month.
If you expect your expenses to be greater than your income, you expect a deficit. To address this, you will either need to reduce your estimated expenses or increase your expected income. Make decisions that will bring your budget into balance. For example, can you find a way to spend less on groceries or entertainment each month? Or, can you get a second job to earn more money?
Devise a system to record your spending for the month to see if you are staying within your budget. At the end of the month, use the data to adjust your budget or adjust your future spending. Did you have spending leaks you did not account for? Do you need to create a new budget category? Do you need to adjust the amount you budget for certain expenses? Do you need to cut back on some expenses? Did you meet your savings goals?
Budgets should be adjusted over time. Ask yourself, Am I spending and saving my money in the way I truly want to?" Am I meeting my needs and working to achieve my goals?" If you have more unspent money on a monthly basis, consider how to adjust your budget to redirect this money to achieve more goals or to achieve goals sooner than expected.
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Budgets can come in all shapes and sizes, but it is important that all budgets are written. For some, writing may mean keeping a digital copy or using an app, for others this looks like physically writing down budget with pen and paper.
A key element to preparing a budget is to do so before you actually receive any income, so before your next paycheck and before the month begins. This is crucial because you are not tempted to spend your earnings before creating a plan for how you really want to spend them. Determine all types of income you will receive such as wages, gifts, refunds, etc. (Dalton et al). All that money that comes to you should be considered income. This includes $5 you find on the sidewalk. This should be treated as income, not random money that comes into your wallet and right back out.
A common technical issue is that some individuals do not know what their income will be before they receive it. This can occur when a person is paid by the hour, by the contract, or by commission. An easy way to work through this bump in the road is to look at previous income for pay periods and take the average of those to estimate what your income will be this coming payday. Another way is to track your hours and multiply it by your hourly rate to determine an estimation for your upcoming income.
By including a section to save a portion of your money, you are able to visually and physically allocate funds for the future. Savings can be on a pre-tax basis from your payroll deductions like retirement. It can also be a post-tax basis from your net income by putting it aside for an emergency fund, your next car, your next house, or a vacation. These post-tax savings goals are known and unknown upcoming expenses. Known expenses such as a house down payment are simple to save for as you know how much money will be needed for the expenses. It is crucial to prepare for the unknown through an emergency fund although it is slightly more difficult to plan for emergencies that may occur. An emergency fund is meant to cover unforeseen financial expenses such as medical bills, plumbing problems, a car breakdown, and so forth. Financial planners recommend creating an emergency fund that covers at least 3 months of month non-discretionary expenses. Read emergency funds for more information.
Debt payments include mortgage payments, auto loans, student loans, credit cards, and any other outstanding account balances. For more information check out debt management for strategies and tips on how to control debt instead of letting it control you.
Bills and living expenses can often be the main focus of a budget as they consist of the primary expenses that individuals (young and old) experience. Some financial planners do not separate bills from expenses, however for the purpose of this article they have been separated. The distinguished items allow individuals to prioritize their expenses and clearly see what expenses are discretionary (non-essential) and non-discretionary (essential). All bills are non-discretionary which basically means they are nonnegotiable. No matter what, these expenses must be paid each month.
These expenses are purchases you make in relation to your lifestyle. How many times you eat out and what grocery stores you shop at determine the amount of money you spend on food. Same with the type of car you drive and the commute to work also contributes to how much you spend on gasoline in a month. Food and transportation specifically are month non-discretionary expenses while the rest shown are discretionary. This means that other than food and transportation the remaining items could be eliminated from the budget because they are not essential.
Understanding the difference between essential (non-discretionary) and nonessential (discretionary) expenses will help you in the event of loss of income when you no longer can afford all the usual items in your budget. Read emergency funds for more information.
Professional financial planners recommend sticking to budget benchmarks for each category in your budget. These benchmarks are designed to help individuals from over or under spending in a category (Dalton et al). For example, if a person was spending 20% on food a month, that would be over the recommended amount to spend for food. Likewise, if you are spending 15% of your income on housing, you are under the benchmark! This means that you could be spending more on housing and therefore own a better or bigger house that fits your needs. Read through the benchmark percentages for each category and evaluate your current written budget. What places are you over or under spending? Adjust as you need to better fit within the recommendations. Also, monitor your actual spending during the month compared to your projected amounts. Adjust as needed here too. It is important to be realistic with yourself and understand that you may need to make changes that best match your lifestyle. That does not mean you make poor financial decisions though, it just means maybe you do not have a house payment so you can afford to save or give more as one example.
The purpose of a household budget is to summarize what you earn against what you spend to help you plan for long and short-term goals. Using a budgeting spreadsheet can help make your financial health a priority by keeping spending in check and savings on the rise!
Prefer to do things yourself? This Excel template can help you track your monthly budget by income and expenses. Input your costs and income, and any difference is calculated automatically so you can avoid shortfalls or make plans for any projected surpluses. Compare projected costs with actual costs to hone your budgeting skills over time.