Often times we ask ourselves “where did all the money go? I just got paid and it’s barely end of the week, but all the money is gone.” If you really want to know where all the money went, you need to create a budget. What is a budget? A budget simply put, is a detailed list of your expected income and projected expenses. It is a spending plan that shows you where your money is coming from and where it is going.
Why do you need a budget?
Like I said earlier on, a budget is a spending plan; it helps you keep track of your expenses. A budget will help you live within your means if you stick to it because you know how much you make and you are able to determine what you can afford. By creating a budget, you can allocate where you want to spend your money and help keep you from overspending your money. This will help you from going into debt, getting out of debt, and building savings.
How do you create a budget?
- List all the sources of your income. Make sure you are using after tax or net income amounts. This is the amount your family has to spend and pay all of the bills.
- List the amount you intend to spend as your expenses. Expenses could be fixed or variable. Fixed expenses are those that stay the same over a period of time like mortgage, rent, insurance, car payment, while variable expenses are expenses that change over a period of time like groceries, gas, entertainment, clothing, etc. You can cut back on your variable expenses because you have control over them. Don’t discount evaluating fixed expenses such as cell phone or cable plans to find ways to save.
- Identify your needs from your wants when creating a budget. Needs are things we cannot live without like food, water, shelter. A want is the direct opposite of a need. It is something you desire but may not necessarily be needed. Most times we buy things we desire, but we actually don’t need them and we can live without. Everything is fine in moderation, so keep your wants in check. Allocate your allotted income to needs first and then prioritize your wants.
Here are some of my tips for budgeting that can help you control how you spend.
Envelope budgeting: This involves putting cash in an envelope for each expense category and when the envelope is empty, that means funds for that category has been exhausted.
Periodic Budget: This involves setting money aside to spend weekly, monthly, quarterly or annually and making sure that you don’t exceed the limits you have set to spend during these periods.
For more tips, here is an article to help.
Using the Budget
Keep track of how you spend by either writing down your expenses on paper or checking your account statements online from time to time.
At the end of a period, either weekly or monthly, total all your income and actual expenses. If your income exceeds your expenses, you are good. You can save or invest with the surplus you have. But if your actual expenses exceed your income, that means you are at a deficit and you need to make the necessary changes like cutting back on an expense category. Review your budget from time to time to make sure you are on track. An example of a common financial website that can help you create a budget is mint.com.
Keep in mind that it’s not only creating a budget that matters, but sticking to the budget once it is created will actually help you in the long run and also help you reach the financial goals you have set for yourself.