A budget can help you plan for both short- and long-term goals, as well as help you avoid spending more than you earn and getting into debt.
First, compile all your financial documents from the past two or three years, including pay stubs as well as bank and credit card statements, and separate fixed expenses, such as rent and utilities, from variable expenses, such as entertainment, dining out and shopping.
1. Know Your Income
Begin by identifying your net earnings, which is the money you bring in each month after you take away your taxes and insurance. To do this, check your bank statements, credit card receipts and pay stubs closely.
Then you should prepare an expense list: your fixed expenses, which stay the same throughout the month (such as rent/mortgage and utilities), your variable expenses – things you buy throughout the month, like groceries and gas – and your debt payments and automatic savings.
With your items listed out, set up a percentage that you want to spend for each expense. Once you have those numbers, you can turn it into a goal. You will want to set up your goal to be a bit flexible because your expenses will vary from month to month, and having a little bit of leeway in the goal per expense category will allow you to stay on track when things don’t go entirely as you planned. For example, if you are lower than your number on dining out one month, why not put the money into your emergency fund to get back on track rather than letting an unplanned expense throw you off track?
2. Know Your Expenses
It also entails spending money now versus saving for the future. Step 1: figure out what you’re currently spending. Keep a running calculation of where your money goes for a month (the longer the better). Start with spending the smallest amount and work your way up. Enter everything and then categorise the money into needs versus wants.
Begin by listing items with predictable amounts incurred each month – your rent or mortgage, utilities, cell phone charge, that sort of thing. Then list variable expenses that change from month to month – food, entertainment and travel costs, for instance. Refer to previous credit-card and bank statements to get some sense, on average, of what you spend each month in these categories.
You can do this manually (and many people find it’s less overwhelming to track day-to-day expenses with a pencil and paper), or you can turn to a smartphone app, a spreadsheet or other financial tracking software. In fact, lots of banks and credit-card payment providers will do the categorising for you. Remember, a budget is a living document that must go through a constant iteration. If you initially underestimate an outgoing item or overestimate another, make the changes. This is part of the budget process, and through it you can adjust to make sure you are reaching your goals.
3. Know Your Goals
Knowing what you want to do with your money is important. What is the goal you have in your mind? Are you looking to save to pay off debts, for retirement or the down payment on a new car? The monthly goals in At Work include paying off debt, saving up for a house down payment, buying a used car and saving for retirement. You will want to do what you need to do to meet the monthly goals, but that won’t happen automatically. For example, the monthly goal of paying off debt means you need to try to save more than you spend each month. One way to do this is to work longer hours or find ways to cut your spending somewhere else.
A budget is useful in distinguishing between needs versus wants, for example. If you’re getting socks, you can consider that a need, when buying a movie ticket is a want. A budget exists to give you the discipline (and accountability) to reach your goals – whether that’s paying off debt or having enough money for fun things.
First, list all of your expenses : Empty out your purse and wallet, open up a banking statement on your laptop, dust off some paperwork, and get to it. Print off the last three months of your bank statement, or spend an hour downloading and cross referencing your credit card balances in a Google spreadsheet. Figure out all of your recurring charges : Really look. It’s possible that your electricity bill comes quarterly. Those credit card bills that can pile up with interest – they come quarterly too. Telephone or cable bills might payment come annually.Scribble down a list of expenses that you’ll never shake loose: what are called ‘fixed expenses’ and ‘variable expenses’. Variable expenses are the things that might not be the same from month to month.
