The first step to making a budget is figuring out how much money you currently have as well as how much money you typically spend in a month. Obtain a copy of your last month’s bank statements, checking accounts, savings accounts, and credit card statements. Make sure the statement you are looking at has at least an entire month’s span for a typical month.
Starting with your checking account, go through your statement and categorize the expenses withdrawn from your account. Do the same with all of your credit card statements as well as all other accounts that you normally deposit income or withdraw expenses from. Track your cash as well. If you don’t know exactly what your cash went to, track your cash withdrawals instead. After you’ve categorized your expenses, total each category.
The next step is to divide your expenses into sections. These are four recommended sections, and you may need to adjust the sections as appropriate.
1) Fixed Essentials
These are expense that are necessary and have the same monthly payment. Examples of fixed essentials are mortgages or rent, car loan payments, personal loan payments, and insurance payments.
2) Variable Essentials
This category is for expenses that are necessary but that don’t always have the same amount monthly. Some examples include payments for gas, water, electricity, and groceries.
3) Fixed Non-essentials
Items in this category are not necessary, but they have a fixed monthly expense. Examples are cable, subscription fees, and other membership fees.
4) Variable Non-essentials
In this last category, items are not necessary with varying payments every month. These expenses tend to be most difficult to predict and include dining out, entertainment, and the incidentals.
Totaling Expenses and Income
Once you’ve added up all the expenses in your categories, you’ll know approximately how much you spend every month barring any financial emergencies. This number is your total expenses. You should also add up your sources of income to find your total income. This includes your paycheck and any other forms of support such as government support, alimony, and child support.
Income vs. Expenses
Now it’s time to see how your income matches up with your expenses. Subtract your total expenses from your total income. If the difference is a positive number, give yourself a pat on the back! This means that you’re generally spending less than you make every month. If you have any debts, this may be a good time to start paying them back. Putting money into savings or investing is also a great way to help plan for your future.
If, however, the difference between your total expenses and your total income is a negative number, that means you’re typically spending more than you make in a typical month, and changes in your expenses may need to be made. Take a look at your expense categories, with the non-essential categories first. You may need to trim some expenses that are not necessary. In fact, you may even find that some expenses you thought were essential may be in fact non-essential. For example, expenses such as gas for your car may be cut down or made non-essential if you take up public transport.
Creating an Allowance
Knowing what your income and expenses are will help determine what you can spend on the non-essentials. After determining how much is going to go into savings, create an allowance. Know what part of your income can go towards your non-essentials, and don’t spend more than you have budgeted.
Maintaining Your Budget
Now that you have a working budget, stick to it. Review your budget every month for the next three months to ensure that you haven’t forgotten to add expenses. Once your budget is on track, continue to review it every few months.
Ensuring that you are spending only what you can afford will help avoid late fees, keep you out of debt, and make saving money a reality. Creating and keeping a budget is an essential part of planning for your future. Start your own budget today.