For many people budgeting just means spending what you earn. In other words, don't spend more money than you have. There is some simple logic in that and, based on the amount of credit card debt in this country (over 1 trillion according to the Federal Reserve), many people aren't even sticking to that rule.
According to a survey conducted this year by the Certified Financial Planner board only 41% of Americans track their expenses and stick to a budget. This is why I decided to write this article. Creating a budget isn't hard; the difficulty comes in when you are trying to find places to shave a few dollars. Don't worry, the next article I'm going to write will detail ways to save money. For this post lets just stick with the basics of creating a budget.
In order to establish a budget you need to get a list of ALL your monthly expenses. This includes household, daily living, healthcare, transportation, education, loans, entertainment, along with charity and gifts. Household includes mortgage, real estate taxes, homeowner's insurance, rent, renter's insurance, utilities, cable/phone/internet, and maintenance. You may also have association dues.
Daily Living consists of groceries, eating out, clothing, personal care, etc.
Healthcare is your health insurance, medication, life insurance, long term care, disability insurance, and veterinarian costs for your pets.
Transportation includes car loans, car insurance, gas, along with repairs and maintenance.
Education is any student loans you may have or tuition you are paying along with costs of books, supplies, etc.
Loans are any loans you have that are not for your home or car. This includes credit cards as well.
Entertainment includes parties or events, hobbies/sports/lessons, membership dues, movies, vacation and travel, etc.
Charity and Gifts is self explanatory. Tithes would go here.
Also, think of any miscellaneous expenses you may have like alimony or child support.
Some of these costs are fixed and some vary based on usage. For example, your mortgage and car payment are the same each month. However, your utilities and credit card bill vary based on usage. For variable payments you need to look at a year's worth of payments, total that up, and divide by 12 to get a monthly average. Once you have that information add up all your monthly expenses and that is what you need to survive. This is where your budget starts.
Now that you know what your monthly expenses are the next thing to do is compare it with your monthly income. Hopefully your need is less than what you are bringing home. If your need is more than you earn you MUST find places to lower your expenses. Using credit cards to make ends meet is okay in an emergency but it is a slippery slope and could land you in a spot you can't get out of. If you can't afford your current budget then adding credit card debt to the equation just makes things much worse.
If your take home pay is enough to cover your expenses than you should be in good shape. However, you really should try to put a few bucks aside each month for emergencies. Ideally you would be able to pay all your monthly expenses, including all the fun stuff, and still have 20% left over for savings. That 20% would not only cover emergency costs but would also be a fund for your retirement.
There are a lot of very good budgeting programs available that can help you keep track. I use some very robust software for my clients but, for my personal budget, I just use an Excel spreadsheet.
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