If you’re new to budgeting, it’s important to understand what a budget is and how it helps you examine what you earn and how you are spending that income. A budget is a financial
plan that takes income and expenses into account and provides estimates for how much you make and spend over a given period of time.
Addressing your financial situation and distinguishing between needs and wants is an important first step before creating your annual budget. Acknowledging areas where you are overspending can be an eye-opening experience. Creating a budget and sticking to it can help you save and reach your short- and long-term financial goals. This is not a one-time exercise. Revisit and rework your budget if you have a financial windfall or setback so it reflects your current situation.
Ready to get started? Understanding the following key components will help you as you begin to build a monthly or annual budget:
- Fixed expenses are expenses that stay the same from month to month, such as rent payments.
- Flexible expenses are expenses that change from month to month, such as how much you spend on utilities.
- Total expenses are the combined amount of your fixed and flexible expenses.
- Total monthly income is the income from your job or other resources including investment dividends, pensions, Social Security benefits, rental income and more.
- Disposable income is the money you have left over after you subtract your income taxes from your income.
The next step is to create your monthly budget using this basic Budget Worksheet. If you find you are not able to stick to your budget, it may mean you are spending beyond your means or that your budget is not flexible enough. Take the time to review and readjust your budget monthly until you find a plan that works for you.
The first step is to create a budget by examining your income and expenses to determine exactly how much money you have coming in and how you’re spending it. Once you’ve got a clear understanding of your current budget, the challenge is to find places where you can spend less (or earn more) in order to achieve your financial goals.
- Question Your Needs and Wants
What do you want? What do you really need? Evaluate your current financial situation and make two lists — one for needs and one for wants. As you make the list, ask yourself the following:
- Why do I want it?
- How would things be different if I had it?
- Which things are important and essential to me?
When your list is complete, reevaluate what qualifies as a need before making any purchases that will impact your budget.
- Set Guidelines
Keep your budget balanced with wants and needs by setting clear guidelines. If you splurge on a vacation, consider cutting other costs that month to offset that large expense. Take a look at the attached Budget Worksheet to get a sense of how to allocate your money for different expenses.
- Track, Trim and Target
Once you start tracking, you may be surprised to find that you spend hundreds of dollars a month on eating out, entertainment or other discretionary expenses. To lower these costs, target areas where you can cut back on spending. Remember that reducing expenses is often a more realistic approach than cutting costs entirely
- LIFE LESSON
What I have learned throughout my life is that the most important step of budgeting is having the discipline to stick to your plan.
Other Tips ( Have a nest egg for life’s twist and turns. Make sure you plan for the unexpected
- Getting laid off
- Engine blow up on car
- Having children