What is a budget and what can it be used for?
A budget is a forecast of income and expenditures. Merriam-Webster defines a budget as “a statement of the financial position of an administration for a definite period of time based on estimates of expenditures during the period and proposals for financing them.” They go on to say that a budget is also “a plan for the coordination of resources and expenditures.” Simply meaning, it’s the blueprint for a family’s financial future. Budgeting is not about how much money you have, it’s about how you handle the money you DO have.
A budget is also an important tool to help with critical decision-making. That could be a financial decision or even a big life decision like whether or not you should retire next year. A budget also helps you to closely monitor your finances and easily spot any financial errors that have been made. Having a budget really could make or break your finances.
Why is having a budget so important?
It can help you provide a financial framework for your future money plans, and it can help you with essential decision-making. A realistic budget ensures that you will always have enough money for the things you need and the things that are most important to you. A good budget can also help keep you out of debt or help you realize what must be done to get out of debt if you are currently having financial difficulties.
By setting up a budget, you can set and reach all of your financial goals in a timely manner. It will help you build more wealth and plan for retirement or other big life events such as a wedding. A budget will also help with:
- Managing your income and controlling your spending
- Preparing you for those large periodic expenses
- Setting aside funds for emergencies
- Putting your money to better use by doing more with less
The process of creating a budget –
How to set up a new budget for the very first time:
Step 1 – Compute your income by listing ALL income sources
Whether you’ve managed to snag a new job right out of high school or you’re still working part-time at a job you had during your college days, you need to know exactly how much money is coming in each month. Create your budget based on ALL of your sources of income you earn over the course of one month. The income column of your budget needs to include your income after taxes have been taken out which is your “take-home pay”.
Step 2 – Add up ALL monthly expenses
Follow these helpful guidelines:
- List all fixed expenses such as mortgage payments, loan payments, and car payments. These expenses are always the same amount and are due every month. The amount never changes.
- List all variable expenses such as food, utilities, and gas for your vehicle. These amounts can change depending on your use of products or services. You will use more heat during the winter months so your gas bill will most likely be more expensive in the winter than in the summer.
- Don’t forget periodic expenses– expenses that occur irregularly – such as car insurance that’s paid quarterly, real estate taxes, gifts for the holidays, doctor visit co-pays, etc. These are the expenses that you don’t pay for every month. They may only be once a year or maybe quarterly. Many people forget to add these to their budgets and then run into problems when these bills become due.
- If necessary, research expenses by using:
- Checkbook registers
- Credit card statements
- Debit card and bank statements
- Phone and utility bills
- Expense tracking tools or Smartphone Apps
Step 3 – Track your spending closely
Get in the habit of tracking your spending – the small everyday costs and the larger periodic expenses that don’t occur every month. Your goal is to come up with a monthly figure to list in all applicable categories on your budget. Tracking your daily expenses helps you to find out where your money goes and to identify areas where you can reduce spending by making some cutbacks. Keeping track of your daily expenses can quickly become an easy routine.
Here are some helpful tips:
- Keep a small notebook with you to record all purchases or use the Note feature on your cell phone.
- Ask for receipts for every purchase you make, no matter how small.
Once a week, enter your daily spending on a spreadsheet or in Google Docs (it’s free to use). Use that information to compute monthly totals to match up with your budget.
Step 4 – Analyze spending vs. income
Compare the total amount of your expenses with your total income from your budget.
- If your expenses equal or are less than your income, you’re doing great. Continue to monitor your spending from time to time, and adjust to suit your financial needs.
- If your expenses exceed your income, you’ll need to take action.
Pick the strategy that best suits your situation:
- Increase your income-
- Work overtime or a second job, if possible.
- Ask a family member to work part-time, if possible.
- Make sure that your federal withholding is correct.
- Decrease your expenses-
- Cut back, not completely out.
- Do a combination of both.
Step 5 – Review your budget every month
It’s super important to review your budget on a regular basis to make sure you are staying on track. Sometime after the first month take a few minutes to sit down and compare your actual expenses versus what’s in your budget. This will show you where you did well and where you may still need some improvement. It’s critical to stay on track as much as possible.
Here’s a helpful list of FREE financial tools and websites:
1) Financial Tools & Calculators – https://www.advantageccs.org/financial-calculators
2) Personal Budget Excel Spreadsheet – https://www.wikihow.com/Make-a-Personal-Budget-on-Excel
3) Mint.com – www.mint.com
4) BudgetPulse – https://www.budgetpulse.com/
What are the key parts of a great budget? –
Categories to include in your budget:
- Income – This is all of the money you receive. Whether from a full-time job, part-time job, hobby, social security, child support, alimony, etc.
- Housing – This category may include your rent, mortgage, home equity loan, utility payments, homeowners’ insurance, and other house-related expenses.
- Food & Clothing – Remember to include groceries, toiletries, dining out, lunches, beverages, clothing, shoes, accessories, dry cleaning, and laundry costs.
- Transportation – These costs are more than just a car payment. They also include fuel costs, car insurance, maintenance, license plates and registration fees, parking fees, tolls, public transportation costs, and more.
- Insurance & Medical – Make sure to include your monthly insurance costs and medical expenses. For insurance, you might pay into life, disability, or health insurance on your own. Medical will include all doctor visits, co-pays, eye care exams, and glasses, dentist visits and work, and medication.
- Savings & Retirement – This is information pertaining to your monthly savings, retirement contributions, and retirement loan payment.
- Miscellaneous – Don’t forget to include child care, any child support you might pay out, alimony, tuition, vacation, entertainment, barber/beauty shop, cigarettes/tobacco, cosmetics/nails/tanning, gym memberships, pets, school supplies, security system, subscription services (magazines), donations/tithe, gambling, and gifts.
- Creditors & Loans – These are all of the financial obligations that you’ve made to creditors and lenders. These can include retail store cards, credit cards, credit union credit cards, collection accounts, finance companies, medical debts, student loans, payday loans, credit union loans, bank loans, personal loans, internet/online loans, rent-to-own items, and taxes/liens/delinquencies.
- Assets – Be sure to list all of your assets. Assets are property or items owned by a person, regarded as having value and available to meet debts or commitments. Any resource with economic value that an individual owns or controls with the expectation that it will provide financial benefit.
- Liabilities – A liability means that you are responsible for something, especially by law, such as a debt or financial obligation. Amounts owed to someone else.
Make sure you include not only the daily expenses but also the periodic expenses that you aren’t used to paying for each month. If you forget those it can really throw your budget out of whack and leave you with a big problem.
How to Calculate and Save for a Periodic Expense:
- Calculate the annual cost
- Divide that by 12 (for 12 months)
- Save that amount every month in a designated savings account
Examples of Periodic Expenses:
- Auto repairs/maintenance
- Insurance not billed monthly (homeowners’, life, auto, other)
- Wage tax not deducted from pay
- Medical, dental, and vision exams
- Real estate taxes not escrowed
- Water and sewage
Financial goals –
The idea of goal setting is to decide specifically what you want. Financial goals should be set and reconsidered periodically because they can change. Goals can be short-term or long-term. Every family member should have a part in deciding which goals are selected. You may have to negotiate with each other over which goals are the most important ones.
Once you’ve determined your goals, estimate their cost and decide when you want to accomplish them. Divide the total cost by the number of months it will take to accomplish the goal to know how much to save each month.
Budgeting your finances can be a challenge, but it becomes easier as you go along. Here are some key rules that will help you successfully budget your money:
- Set financial goals that are realistic and specific. This will help keep your spending in line or motivate you to save.
- Pay attention to how you spend your money. Get in the habit of tracking your day-to-day expenses to see where all of your money goes.
- Give top priority to your financial needs, and then consider your wants. Prioritize your family’s expenses according to needs.
- Set aside a fixed amount for savings every payday – ideally 5-10% of your net income. If 5-10% is too much, start with $10 a week and gradually increase the amount as you get in the habit of setting aside money in an interest-bearing savings account.
- Limit debt payments to 15-20% of your net income if you can. If you can afford to pay more then by all means go right ahead.
What happens next? –
Create a game plan:
Learn how to make some cutbacks –
Using the information described in this section will help you take control of your finances. You’ll be able to meet goals, handle emergencies, and pay those large periodic expenses when due.
With an unlimited supply of goods and services to choose from, but only a limited amount of financial resources, budgeting will help you make the right choices on when to spend and when not to.
Keep your spending plan handy as your blueprint for your financial success. Contact the professionals at Advantage Credit Counseling if you need help with your financial difficulties.
Savings Strategies –
How can you make savings a consistent part of your budget? Here are some suggestions to consider:
- Set financial goals – both short-term and long-term. They really help you stick to your budget and will motivate you to save.
- Use payroll withholding or direct deposit, if your employer offers it. Determine a set amount of money you will have deducted from your paycheck. This way, you don’t even ‘see’ the money; it automatically goes into your savings account.
- Save any additional income, such as raises, overtime, bonuses, or extra paychecks (due to the calendar).
- Save your tax refund.
- After you pay off an installment loan, continue to pay the monthly amount to your own savings account.
- Save your loose change! It’s a surprisingly easy way to save.
Cost-Cutting Tips –
- Ask your utility company to perform an energy audit of your home.
- Set the water heater to the lowest acceptable temperature.
- Eliminate premium cable and extra phone services.
- In the winter, turn down the thermostat during the day when you’re not home.
- Consider buying a programmable thermostat.
- Get rid of halogen lamps. They use 4 times more energy than lamps with 75-watt bulbs.
- Grocery items
- Avoid costly convenience stores and convenience food items.
- Use coupons if they will result in products that are cheaper than
- Store brands.
- Keep simple foods on hand when you’re too tired to cook to avoid eating out.
- Buy store-brand over-the-counter medication and pain relievers. Compare the ingredients; they usually will be the same.
- Pack your own lunch. A restaurant lunch can cost four times more than the one you bring from home.
- Make use of free entertainment at public libraries and local parks.
- Start a dinner club with friends and take turns hosting dinners.
- Wait until movies arrive at cheaper neighborhood theaters or rent videos.
- Go to matinees.
- Discuss increasing your car insurance deductible with your agent.
- Discuss eliminating collision coverage on older cars.
- Shop around for insurance.
- Discuss increasing your homeowner’s insurance deductibles with your agent.
- Consider term vs. whole life insurance.
- Gift giving
- Cut back on expensive gifts. Shop year-round at sales to stock up on holiday and birthday gifts.
- Avoid expensive gift wrap. Buy holiday gift wrap at post-holiday sales. Re-use gift bags.
- Give gift certificates as gifts. This way, you won’t overspend.
- Consider a grab bag if you’re part of a large family.
- Give ‘coupons’ for gifts. Make them good for car washes, house cleaning, baking, dinners, etc.
It’s clear to see why it’s so important to create and closely monitor a household budget. We hope that you’ve effectively learned how to create a new budget and how to monitor it properly. Learning how to budget effectively is not terribly hard, but it does take a little time to sift through all your spending records and track where your money goes. Sadly, that is part of the budgeting process and important to help you manage your money wisely. You need to be able to look at your spending honestly and locate unnecessary items that could be cut out or limited.
Now that you have a basic understanding of how to make a budget, you have no excuse to put it off any longer. A good working budget is something to be proud of. If you need help with anything, you can always give our certified credit counselors a call. The call is 100% free and completely confidential. They can assist you with setting up a budget and give you some advice on how to properly manage your finances and how you can get out of debt if you’re having some financial problems. Give us a call at 1-866-699-2227 or visit us at www.advantageccs.org.