Most people never get close to using a budget. They think they do because most of the time there is money left over at the end of the month. You will hear them say that they were under budget. However, having a budget means more than making enough money to live on.
To do it right, you have to take a period of time like a month or even a quarter and keep track of every penny that you spend. It’s not a huge amount of fun, but in the long run it can be profitable. Learning where your money goes can be a scary proposition. This is especially true when you see how much you spend on junk food and things that you don’t need. During this time, try not to alter your spending habits although you probably will anyway.
At the end of the period, sit down and group your expenditures into categories like food, clothing, transportation, housing, insurance, health care, etc. When you’ve finished that, inspect the list for anything that may not have come up during the period, but you know that you have to spend money for or eventually pay.
An example of this might be an annual insurance payment or property taxes. You may not have bought clothing during the period, but you know someday you will. Estimate how much you would have spent on those things during the period. If you used a quarter, then divide annual expenses by 4.
If you used anything other than 1 month for your period, divide all of your numbers by the number of months in your period. This will give you a rough but somewhat accurate estimate of how much you spend each month on specific things. Look over the numbers. Do any of them look too high or too low because you know of special circumstances during the time that skewed the totals.
Add up all of the totals for a month. This is how much you have to spend every month just to keep everything paid. Hopefully, this is somewhat less than your household income. Now, take the difference and remove part of it for regular savings. If there is enough, take a little more for a retirement account.
If you still have money left, put it into your savings until you have accumulated at least 3 months worth of expenses. If you are already there, then this is the money you can let accumulate for special purchases like birthday presents, Christmas, or whatever else you want to spend money on. I recommend that you take an allowance out of it for your weekly spending money and save the rest to only be spent in special circumstances.
Now, get a ledger and record the names of everything you spend money for down the left side. In the first column, label it budget and record the amounts that you computed. If you have a computer, do this on a spreadsheet. Except for your allowance, keep track of your spending and watch for areas where you exceed your budget. If these are exceptional situations, don’t worry about it too much. If they are normal, then change your budgeted amounts.
Once a year, go through this exercise because utility bills can increase, income can increase, and you may have taken on extra debt like a new car. Your budget will tell you if you can afford such items. A good well-managed budget will keep you financially fit month to month and year to year. Be honest with yourself and don’t overspend your budget.