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How To Make A Budget

February 8th, 2010 Subscribe To Our Feed

Many people turn green when they hear the word ‘budget’, but if asked where their money went, could they account for it? Instead of it being seen as a ‘negative’, having a clear sense of ‘in-come’ and ‘out-go’ can really put you in the driver’s seat of having a great financial future. The real key is to have one before you need one.

So, how do you make a budget? Their are two things absolutely necessary in creating a budget. You need to know what your total income is and what all your expenses are.

Determine Average Monthly Income

For many, knowing their total income for a month or a year is simple and straightforward: that is those who work salaried jobs, who are paid a fixed wage. For others it may take a little more effort to come up with a figure. For people whose income is based on commission, look at your previous year’s net income and divide it by 12 to get an average monthly value. If you have increased or decreased your sales by some percentage, factor that in. For people who have no ‘regular’ income, it’s going to be very important to have a clear understanding of your expenses to know the minimum amount your monthly income needs to be to accomplish your financial goals.

Calculate Average Monthly Expenses

Determining expenses can be a little more tricky. To really get a handle on where your money goes, record for at least a month, even longer, every penny you spend. Though this can be tedious, it can also be very enlightening. Also, checking out those bank statements that so often go unopened, can shed some light on where money is going, if you’ve never paid attention to monthly service fees.

Once you record your monthly expenses, you need to add in expenses that may only occur once or twice a year, such as car or home insurances, school tuition fees, water heater rentals, etc. There are many spreadsheets available online to help identify expenses by categories, and can then be used to do the math for you. (You can get a spreadsheet
here.) If you’re manually doing to calculations, for the expenses that occur only once or twice a year, divide their amounts by 12 to determine what their average monthly cost is and add it into your expense calculations that way.

Compare Monthly Income And Expenses

After you have determined your average monthly income and your average monthly expenses, you need to compare the two figures, and for some - with fingers crossed - hope that the income exceeds the outgo.

Happy Day

For those with greater income than expense, you can consider what you are going to do with the excess, be it developing a strategy to pay down debt, or investigating ways to make it grow.

Decision Time

For those whose expenses exceed their income, it becomes decision time as there are really only two alternatives. One is to look at ways to cut back, the other is to expand your income. I guess it’s three if you do both!

If you decide to cut back, you have to review your expenses and divide them into ‘fixed’ and ‘variable’ categories. Fixed expenses include things like power and rent or mortgage payments, anything which has to be paid. The variable category would contain expenses such as things falling into the entertainment category - the things that are nice to have, such as cable TV, but you wouldn’t die if you didn’t have them (even if you claim you would!!).

Your food expenses could also fall into this category. Yes, you could die if you didn’t have food, but what could potentially change here would be the number of restaurant meals purchased in a month, or the number of ‘prepared’ meals bought from the grocery store. Making coffee at home in the morning instead of stopping somewhere on the way to work - even if all it cost was a dollar a day, makes a difference of $30.00 at the end of the month.

If you decide you’d rather increase your income, be careful not to inadvertently loosen your grip on your pocket book and spend a little extra here or there. Make sure that that extra money you are earning is going to the exact place you went out and earned it for.

Get A Little Help

If you’d like some help with getting a real grip on where your money is going, here is a service that you may be interested in trying out. Note that this is for US residents only.

See Your Budget As Your Friend

Since budget is not a four-letter word the sooner it becomes a friend, the better your chance of sticking to it and ultimately making your money work for you, rather than you having to work for it.