Making your Budget

Mon, Jan 17, 2011

Budgeting

Making a budget may not be exciting, but it’s an important tool for keeping for finances in order. Before you even start, it’s important to know that in order to make a good budget you will have to use as much specific, detailed information as you can find. In the end, a good budget will be able to show you where your money’s coming from and where it’s going.

Here’s how you do it.

1. Gather your financial statements. All statements, receipts, records that speak to sources of income or expenditure. The most important part of this process is having enough information and monthly average values for non-fixed sources of income and expenditure can be established.

2. Record your income sources. Record all your sources of income, including income from self-employed and part-time work. If your income is in a form which automatically deducts taxes, etc, record the net amount as your total monthly income.

3. Make a list of monthly expenses. Write a list of all the expenses you plan to incur over the course of a month. This includes all variable and fixed expenses. Everything you spend or plan to spend money on.

4. Divide expenses into fixed and variable. Fixed expenses: stay more-or-less the same every month and are necessary and vital to your life. These typically include things like mortgage and rent payments, credit card payments, etc. Variable expenses are those which can change markedly from month to month, and include things like groceries, entertainment, gifts, and gasoline. Many of your budgetary adjustments will be made to these values.

5. Total income and expenses on a monthly basis. If your initial results are showing more income than expenditure, you are off to a good start. You should prioritise excess to things like debt reduction and retirement savings. If your expense column is higher some adjustments are going to have to be made.

6. Make any required adjustments to your expenses. The idea is to equalise your income and expenses columns. This will mean that all your income is counted and budgeted for specific expenses (including savings). If you find yourself in a situation where your income is less than your expenditure you should look to your variable expenses to find areas to cut. Since these expenses are usually nonessential it shouldn’t be hard to trim them to bring your expenses total closer to that of your income.

7. Revisit and review the budget each month. You need to review your budget every month to ensure that you are staying on track. Sit down and compare your actual expenses and income versus what you had created in the budget. In this way you can figure out where you’re doing well and where you need to improve.

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