The Basics of Budgeting
What is budgeting? To many, it’s a topic that evokes a tremendous amount of anxiety. “Creating a budget is much too difficult”. “It takes many hours and an understanding of accounting that most people don’t have”.
A budget is nothing more than a plan of how to manage money over a given period of time. It does take work, but getting started is much easier than most people realize.
The starting point for any budget is to ask some questions. How much money do I bring in during a week, month, or a year? How do I spend my money during that same period of time? What are my goals? To capture the money inflows and outflows, I recommend spending an entire month writing down how every dollar is spent and every dollar that is earned. Every pack of gum, each cup of coffee and every pack of cigarettes should be included. Also, it is important to use the amount you are actually paid in your paycheck (net earnings) rather than the dollar per hour or salary you earn (gross earnings). Finally, what are some things you would like to buy? Do you want to take a vacation? Do you want a new car? Are you saving for a child’s college education? And how much will each of those items cost? All of this information serves as the foundation for creating your budget.
When you do your goal setting, you must identify “needs” versus “wants”. For example, you need a car to get to work, but you don’t need a Mercedes. The Mercedes is a want. You need jeans to go to school, but you don’t need $100 designer jeans. The designer jeans are a want.
The income you earn can come from numerous sources. If you have a job, you earn a paycheck. If you receive money on your birthday or sell items in a garage sale, that is also income. When you receive a paycheck, you also receive a pay stub. It is important to understand what is included on the pay stub. If you earn $10 per hour and work 40 hours in a week, your gross income is $400. However, there are deductions that reduce your earnings in order to arrive at your net earnings. Those deductions include federal and state income tax, Social Security tax, Medicare tax and any other deductions you may have for medical insurance, 401K, etc.
Expenses can be broken down into variable and fixed expenses. Fixed expenses are items that must be paid every month and the amounts don’t change. Examples of fixed expenses would include your car payment, auto insurance, and rent. Variable expenses can change which means there is some level of control. Examples of variable expenses would include food, gasoline, utilities, clothing and entertainment. Another fixed expense that you can create is summed up in the phrase “pay yourself first”. It is an easy way to begin saving and ultimately putting yourself on the track to getting the items you highlight as your goals. The concept is that each time you receive your paycheck, take some money and move it into a savings account. The trick is not giving yourself a choice and making it a regular part of your budget. Most self-made wealthy people use some form of this concept.
If your income exceeds your expenses, then the additional monies can be saved or consumed. However, it is important to consider saving at least a portion of this overage to account for any unplanned items (i.e. car repairs, home repairs, medical expenses).
If your expenses exceed your income, then an adjustment needs to be made to your budget because no one can survive spending more money than they earn forever. As a result, either less money can be spent or more money needs to be earned.
Once your budget has been created and you’ve reached a point where your expenses do not exceed your income, you must go back and determine if the goals you set at the beginning can be attained with your budget. If not, then additional adjustments to either your budget or your goals must be made. Maybe you need to get a second job. Maybe you don’t need to eat out or buy that Starbucks coffee every day. Maybe you can buy a used car rather than a new one. The important thing is evaluation and an understanding that your budget is a living document and your goals can change regularly.
For free budgeting tools and other credit counseling services, visit Consumer Credit Counseling Services’ website at www.moneymanagement.org
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