The following is a guest post from Jonathan from Master Your Card. It’s a basic budgeting piece that many readers of this site will find too simplistic. That said, I’m sure some will find it useful as well — if for nothing else than to pass on to a friend that is just getting started managing his money.
Why Do I Need A Budget?
It’s simple: Building and maintaining a budget is essential for anyone planning to live a financially stable life. Many individuals (and families!) fall into deep household debt because they have not created a budget, and consequently it’s virtually impossible to track where all the money has gone. If you find that your monthly income has disappeared before the month is over, or you think you don’t have a great handle on your finances, you need to create a budget.
A budget will help you see where every dollar you make is spent. Once you understand how your money is spent, you can identify ways to reduce some of your expenses. Building a financial road map each month will help you navigate to a sound financial future.
How Do I Build My First Budget?
Building a budget has become relatively simple in the technology age. While you can still manually create one with pen and paper, there are a variety of web sites that offer free budget forms and personal finance software (PFS) to help you design your first budget. Some good sources for budgeting forms and software include:
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PearBudget – Popular Free Budgeting Spreadsheet
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Free Budget Forms from Dave Ramsey
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BudgetPulse – Free Internationally Compatible PFS
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Mint – One of the most popular PFS with nearly 1 million users
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You Need A Budget (YNAB) – Software dedicated to changing the way you handle your personal finances
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Moneydance – Mac, Windows, and Linux Compatible PFS
Regardless of what platform you use, a budget has a few standard procedures you must follow.
. Compute your monthly income – Take into account all sources of income you have to create your income figure. Use monthly income to create a monthly budget because it allows more flexibility from month-to-month. It would be a pain to try to forecast your budgeting needs ten months from now—keep it simple by focusing solely on the upcoming month.
. Collect your monthly bills and receipts – Certain expenses, such as rent, mortgage payments, and phone/internet service will stay relatively the same each month. However, you may need to collect receipts from the past few weeks to estimate how much you may spend on food, clothing, and gas for the next month. Your best estimates going forward will come from what you have actually spent in the past.
. Adjust your expenses to fit your income – For some people, the list of expenses may exceed the income. In this case, it is important to evaluate which expenses can be cut or decreased. For example, your various monthly debt payments may be decreased if you consolidate your debts.
. Allow for saving – After matching your expenses to your income, you can continue by allocating a portion of your income to savings. This allocation of your income to savings will put you on the right track financially and allow you to retire with money in the bank.
Remember that every expense you incur needs to be included in your budget. You will never be able to manage your money if you do not know where it is! Also, by identifying your expenses, you can find ways to reduce your expenses and move more money to the saving/investing category. Don’t forget that almost every expense, even seemingly “fixed” expenses, can be reduced.
Stick To It!
The time you invest in creating your budget will be wasted if you cannot find ways to stick to your budget. The best part about a budget is that you are in charge of creating it, so build in some flexibility where needed. Some expenses will be underestimated and some will be overestimated, so keep some “wiggle room” to account for this.
While creating your first budget may seem difficult, the toughest thing will be sticking to your game plan each and every month. Make budgeting fun by setting a goal and reward system to keep you and your family on track. For example, you may allocate some of your income towards a “Reward” category that only gets spent if you are able to successfully maintain your budget for the first two months.
Another helpful idea to ensure that you succeed is to create a “cushion” category. No one can perfectly estimate their spending over an entire month, and the first few months will be particularly misestimated. Therefore, you should budget some money each month towards covering any unexpected expenses and overspending. This will keep you on budget more often and encourage you to continue.
Without understanding why most budgets don’t work, you may fall prey to the common problems faced in creating a budget. Remember to be realistic when creating your budget—use your actual expenses in the past to help you estimate your monthly budget. Also, maintain flexibility in your estimates to keep yourself on track and motivated. Finally, by including a savings category and sticking to your budget, you will ensure that you leave a lasting financial legacy for your family.
