Ready to get financially fit? First things first: creating a budget. There are a few logistical routes to take -- you can use a free service like Mint, a paid software like Quicken, or you do it the old fashioned way with a pen and piece of paper. Either way, it's all based on the same concepts.
We'll go with the paper and pencil method to get you started.
Step 1: Determine Your Goal
At the top of the page write down your goal. This can be as simple as to not overspend your income and run out of money by the end of the month. It can have an achievement in mind like to save enough money for a new computer, a vacation, or a down payment on a house. It can try to resolve a problem such as getting out of debt. I personally like the goal of getting a handle on my financial flows so I don’t have to worry about money and can feel in control of my finances.
With a goal at the top of the page, we can look through the information in our budget and write an action statement at the bottom.
Step 2: Estimate Income
Find your pay stubs and write down how much you earn on the top line. Use the gross amount before deductions. Then on the second line, write down any other sources of income that you might have. If you are lucky enough to get a monthly payment from a trust fund, helpful parent, or child support, write it down here. On a separate line write any income you might receive from a second job or any special projects that you have. Draw a line and sum it up. This is the complete picture of your total monthly income.
Step 4: Estimate Expenses
This can be a bit more challenging because we do not always know where we spend all our money. To make it easier, divide expense into two types: fixed and variable. Fixed expenses are the ones that you don’t have any discretion over in the short run. This includes taxes, rent or mortgage payments, car payments, utilities, childcare expenses, and insurance. Variable expenses change from month to month and can be altered by your choices or preferences. Here you will be listing food and dining out, entertainment, clothing, maintenance furnishings, vacations and gifts. Don’t forget to include savings and investments because you will need to provide for a financial cushion for the future.
Making the list of expenses will be your hardest exercise. The fixed expenses like rent and utilities are usually easy to find off the monthly bills. Some expenses like car insurance and registration are annual payments that have to be retrieved from your records and then proportioned to a monthly payment. Taxes and employment deductions can be found on your paycheck stub.
Tracking the variable expenses is more difficult. Credit card receipts can help, but eventually you will want to track all your expenses -- including those mocha cappuccinos -- into a large monthly amount. If you don’t know, make the best guess that you can and correct it later. Make sure you add the line item "savings," even if you do not save anything right now. The total income should equal the total expenses but if it doesn’t, enter the difference in the savings line.
Step 6: Calculate a Percentage For Each Category
Now take the total for each expense item and divide it by your total monthly income to find the percentage you spend on each item. For example, take the rent or mortgage payment and divide it by the total income number and multiply by 100 to get a percentage of the total. Proceed on down the column to find the percentage of every expense.
Step 7: Review and Evaluate
Congratulations, you now have a budget plan! The numbers on this budget are largely estimated and historical, but you now have a financial plan in front of you that you can work with.
Here’s how to think about it -- your income from the top of the page is spent on all the items below. The percentages allow you to gauge the relative size of each expense. Your rent and housing costs should be about 30% of the total. Taxes, food and other fixed costs will take another 30% leaving about 40% for variable expenses. That is where it gets interesting.
How well defined are those variable expenses? Do you really know what you spend your money on? At the top of the page you wrote down your goal. How do your spending patterns reflect your goals and how can you change them to help you achieve those goals?
Step 7: Fix the Things You Don't Like
There’s no sense in complaining if you don’t intend to fix it. You have a goal in mind, so determine what action items will help you achieve that goal. Start keeping track of those expenses so next month you can be more certain what you spent on each item. Review each item and see if that’s what you really want to spend on that expense. The income entries can change too if you decide to look for a better job, get a part-time job, or work some overtime hours to earn more.
Your budget maps out your financial routines. You can see what you earn and where you spend it. Just like your diet counts calories and balances fats, proteins and sugars, your budget shows you how to balance your income and expenses. Hopefully gaining control of your finances will make you feel happier and financially heathy. Now write that action statement across the bottom of the page.
Sample Budget Worksheet:
|Income||Amount||Percent of total|
|Social Security and Taxes|
|Housing (rent of PT&I)|
|Car and Transportation|
|Medical and Dental|
|Travel and vacation|