Having a budget does not mean you have to deprive yourself of your favorite things—in fact, it’s just the opposite. It will help you find money for the things you want or need, and help you manage your money effectively. This chapter will teach you how to create and maintain a monthly budget and set clear financial goals.
Unit 1: Creating A Budget
Making the Most of Your Money
In determining a proper budget, we look first at whether we are able to balance our income and expenses, or, "do we have enough money to cover the bills?" An important part of understanding budgeting is becoming familiar with cash flow. Cash flow refers to the money you have coming in, as well as the money you have going out.
Before creating a budget you need to know your total income and expenses:
Income includes money earned from employment, part-time work, an allowance, or interest earned from an investment. Deduct income taxes and other payroll deductions such as insurance or investments, federal and state income taxes, Social Security taxes, and Medicare taxes. These taxes diminish your total earnings or gross income.
Expenses include all monthly amounts spent for categorized expenses such as housing, transportation, entertainment, or groceries. There are basically three types of expenses:
- Fixed expenses are costs that are the same every month such as a mortgage or car loan.
- Variable expenses fluctuate in amount each month, such as food or clothing expenses.
- Periodic or occasional expenses are expenses that do not occur monthly but are regular expenses such as car repairs or car insurance.
Creating a Budget
Now you are ready to begin creating a budget. The following information will guide you though the budgeting process.
Step 1: Gather Information
- Gather financial statements. This includes bank statements, investment accounts, recent utility bills, credit card statements and any information regarding a source of income or expense.
- Record all of your sources of income. If your income is in the form of a regular paycheck—where taxes are automatically deducted—then use the net income, or take home pay amount. Record this total income as a monthly amount. If you are self-employed or have any outside sources of income be sure to record these as well.
- Create a list of monthly expenses. Write down a list of all expected expenses over the course of a month. This includes a mortgage payment, car payments, auto insurance, groceries, utilities, entertainment, dry cleaning, auto insurance, retirement or college savings and essentially everything you spend money on.
- Break expenses into two categories: fixed and variable. These expenses for the most part are essential, yet not likely to change in the budget, such as mortgage or rent, car payments, cable and/or internet service, credit card payments and so on.
Variable expenses are the type that will change from month to month and include items such as groceries, gasoline, entertainment, dining out and gifts to name a few. This category will be important when making adjustments.Continue