Budgeting

In the world of personal finance, learning how to make a budget plan is one of the most important skills to have. If you don't know how to create a budget plan, don't worry, you are not alone, this article will help you but if you know how to create a budget plan and stick to it, then you are well on your way to being a good steward of your money. There are all kinds of ways to approach this topic. There's no doubt that if you’ve done any searching, you’ve already found a dozen people, each with their method of making a budget. In my opinion, there are two ways to go about this, depending on your situation. The back to the Front method If you have a family or if you’ve been out on your own for a while, then you’ve already found some way to get by. You may feel like you’re spinning in circles, but you’ve at least found a way to keep the lights on and put food on the table. By looking back at what income you’ve brought in and where your money has been spent, you can at least put together a basic budget based on your historical finances. Pull out your bank statement, credit card statements, and anything else you have that shows your income and expenses for the last 3 months. Also Read: Is Credit Card Better Than Debit Card? Using a notebook or a spreadsheet, make a list of your income. If your income isn’t consistent, then average out what you have made over the last 3 months. Make sure you don’t include any income that you aren’t expecting to receive in the future. (a one-time bonus for example.) For simplicity, use your net paycheck. Your "net paycheck" is what you get to put in your pocket at the end of each week. That way, you don’t have to worry about budgeting for taxes or any other items that are deducted from your check. how to make a budget plan Next, take a look at all of your expenses. Break down everything you have spent over the last 3 months into the following categories: Taxes – (this won’t apply if you use your net paycheck when totaling your income – download tax software if you need some help tracking taxes) Savings – (Just an FYI – you should set up a separate high-yield savings account for this.) Charity Housing: This includes rent/mortgage, renters' or homeowners' insurance, utilities, maintenance, and anything else directly related to your home. Auto – Includes car payment, insurance, gas, and maintenance. Food – Includes groceries and eating out. Healthcare Entertainment Miscellaneous Do your best to figure out how much you spend in each category on average. Now, subtract your expenses from your income. Are you net positive or are you in the hole each month? If you’re not positive, congratulations! That’s an exciting place to be. If you spend more than you make each month, don’t fret. You’re right alongside the vast majority of people in America. The good news is though, you’re working on a budget. You are on the road to taking control of your finances. Also Read: How to Effectively Budget as a Business What to Do If You Spend More Than You Earn Let me give you a straight answer first – you need to start spending less than you make! I’m sure you knew that though. It’s a lot easier said than done. The reason so many of us are in debt is that we live above our income. We need to learn to cut expenses and bring our lifestyle in line with our income. Here are some straightforward tips to cut expenses: Downgrade your cable package or cut the cable altogether Limit your dining out to one time per week. Try buying off-brand items in the grocery store. You may find that you can’t tell a difference between them and the more expensive name-brand items. Before you go grocery shopping, make a list. When you get to the store, if it’s not on the list then you don’t buy it. Get rid of your data and text message plans on your cell phone. Another way to get ideas is to see if there is one category in your expenses that is a lot higher than the others. See if there is something in there you can cut out. Keep trimming expenses until your income exceeds your expenses. You now have a budget that (hopefully) you can stick to. Check out what I’ve written on how to get out of debt for more ideas on cutting expenses. how to make a budget plan The Front To Back Method The other way to think about making a budget is to start with a set of ideals and then try to work your expenses into those. Between the two methods, I think this is the better way to go. though it takes more discipline. However, one significant advantage is that it assists you in budgeting your savings and charitable giving, both of which I believe are extremely important. I also think making a budget this way is easier since you don’t have to pull out all of your financial activity for the last 3 months. The way that the front-to-back method works are by assigning a portion of your income to categories using percentages. Think of it like cutting your income pie into predetermined portions. Here’s how to make a personal budget with this method – take your gross monthly income and multiply it by the following percentages: 12% Taxes 10% Savings 10% Charity 30% Housing 11% Auto 10% Food 9% Healthcare 5% Entertainment 3% Miscellaneous You can also look at it on an after-tax basis with these percentages: 10% Savings 10% Charity 35% Housing 13% Auto 12% Food 10% Healthcare 7% Entertainment 3% Miscellaneous On a $50,000 per year income, here is how your budget would look monthly Basis: Savings – $367 Charity – $367 Housing – $1,283 Auto – $458 Food – $440 Healthcare – $375 Entertainment – $257 Miscellaneous – $125 I think this is a fairly reasonable budget for a family of 4. Now, these numbers aren’t set in stone. You still need to move things around based on your family and the cost of living in your area. Maybe you don’t have a car payment, then you can shift some of that to housing or entertainment. I think that’s pretty straightforward. There’s no magic trick to budgeting money. It’s simply a matter of assigning your income to categories and then sticking to it Also Read: How to Get Out of Debts Fast on Your Own Budget Tips and Tricks Here are a few other things to keep in mind when you’re making a budget: Don’t make a budget if you don’t plan on sticking to it. You’re just wasting your time otherwise. Be realistic when budgeting your money. If you love to go to the movies then try to find a way to work it into your budget. Otherwise, you’re setting yourself up for failure. Don’t be afraid to make adjustments 60 days down the road. Don’t make adjustments too early though. It’s helpful to have a couple of months of spending history to judge how well your budget is working. Include the whole family in the budget process. When everyone is in on the decision then everyone can be a part of sticking to the budget. Don’t let your budget act like a prison. Let it free you. Don’t feel guilty about going out on a date with your spouse. If you have it in your budget then you are free to spend the money.

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