In today’s challenging economy, it’s more important than ever to know where your money goes. Taking the time to establish a budget is one way to understand how you’re spending and make decisions about where you can cut back if necessary.
To create a budget, you must start with the basics. List all your income. If you earn a salary or work about the same hours each week, this will be easy. If you work variable hours or a part of your income is from tips, you will have to estimate your earnings based on the average of the last few weeks or months. Start with your gross income, and then list all the deductions from your paychecks. This can include federal income tax, social security, health insurance, 401k, cafeteria plans, and so forth. The net amount should be the total amount of money you have available to spend each month.
The next section of the list should include items that you must pay each month. People will argue the necessity of many different items, but you must include keeping a roof over your head, getting to and from work, paying utilities, eating, having clothes to wear, and meeting other legal obligations. In order not to forget things, it’s a good idea to review your bank statement or check register for the last few months.
If you own a home or condo, this includes mortgage payment, homeowner’s insurance, property taxes, and homeowner’s association dues. If you rent, this will be your rent payment. If you live in a city and pay a monthly parking fee, include that. List all utilities: electricity, water, gas, sewage, garbage, and telephone. Estimate your expenses for groceries, toiletries, and household supplies each month. If you own a car, list your car payment, car insurance, fuel, tolls, and car maintenance. If you use public transportation, list the cost of train, bus, or subway fares. Estimate a clothing allowance. If you are required to dress a certain way for work, make sure you take that into account.
If you have private health or life insurance that is not deducted from your paycheck, list that. If you have other family obligations such as alimony or child support, list those. You must also include debt repayments if you have debt other than your mortgage or car payments. This includes payments on credit cards, home equity or other personal loans, and student loans.
Once you have totaled all these required expenses, you can subtract that number from your available income and see what is left over. Now you can begin to look at discretionary items.
Do you put away a regular part of your income toward savings? Do you make regular contributions to your church or other charities? Do you save for vacations?
What do you spend for entertainment? Is your internet linked to your telephone, cable, or satellite bill? Do you pay for premium channels on cable or satellite television? Do you pay for movie rentals? How much do you spend on eating away from home? Don’t forget lunch or stops at Starbucks.
Do you go to the salon every month? Do you get professional manicures or pedicures? Do you pay a gym or fitness club membership? Do you pay for other maintenance or home care services? Do you pay other club dues or memberships? If you have a pet, make sure you include the cost of food, supplies, and veterinary care for your pet. Do you buy gifts for family members or friends?
It’s not possible to list here every potential expenditure you might have, but you need to think about those expenditures. Once you have completed your list, add up the items and see where you are. If you are spending less than your available income, good for you. If you are like many people, the expenditures exceed the income, and this results in the credit card balance creeping up month by month or getting behind on required payments. In order to be financially responsible, you must spend equal to or less than your income. There is no way around this.
You have to look at your spending and decide where you can cut back. One person might decide that she can’t give up her regular salon appointment, but she is willing to get rid of premium channels on the television. Another person might decide he won’t give up his gym membership, but he’ll take over the lawn maintenance himself. The specific decisions are entirely yours.
Once you’ve decided on a spending plan, you have to live with it. One good way to keep yourself on track is to record your expenses at least weekly. This keeps you thinking about your budget and will quickly show you if you are exceeding your planned amounts by a large margin. You can do this on paper, in a computer spreadsheet program, or by using any number of personal finance software programs. The key is consistency. Going through the effort of identifying your expenses, knowing you need to change your spending habits, and then not doing it won’t get you anywhere.
Take charge of your financial situation. You will be glad that you made the effort and, in the long run, it will make your life easier and less stressful.