Throw out the topic of a personal budgeting at your next gathering of friends, and odds are that everyone will (a) groan and change the subject, or (b) look shifty and change the subject. That's because budgeting money has gotten a bad rap as being difficult, time-consuming, and a real drag. In reality, nothing could be further from the truth!
Using a personal budget to guide your spending creates flexibility and freedom from worrying about money, primarily because you already know exactly how much you have, instead of holding your breath at the ATM or bouncing another check. You will be aware of the exact amount available for you to spend, so you can evaluate whether you really want to spend it. Perhaps there is a financial goal you'd like to reach; budgeting for that goal will help you accomplish it 10 times faster than wishful thinking alone.
Whatever the reason may be, setting up a personal budget will reward you both financially and emotionally.
- Start by gathering recent billing statements and receipts as well as your most recent pay stub. These will provide you with vital information. Also get several blank sheets of paper, a pencil, and a calculator.
- Begin by calculating your total monthly income. On one sheet of paper, write down the total of your monthly earnings. Include wages, tips, alimony, child support, and any other sources of income. The sum of these figures is your total monthly income.
- On a second sheet of paper, add up your total monthly expenses. The easiest way to do this is to separate expenses by category: housing, food, transportation, utilities, medical, entertainment, and so on. Be sure to include money placed in savings, emergency funds, and debt reduction, if applicable. Use the billing statements and receipts to get an approximation of the monthly costs of each need, and write the individual totals under each category. Add the category totals together and the resulting sum is your monthly expenses.
- Compare the sum of your expenses against the sum of your income. One number should be larger than the other; shaping the rest of your budget depends on which sum is higher.
- If your income is greater than your expenses, that's good news! It means that you are covering your obligations and staying afloat financially. But don't get cocky, because it's no guarantee that you're getting the maximum bang for your buck. Assess each of your expenses and identify any areas that could be cut back without difficulty. Use the money that you save to bulk up your retirement account or make an extra mortgage payment, and you're doing yourself a favor twice over: Once by using your money wisely and twice by securing your future.
- If your expenses are greater than your income, you are headed for trouble. Go back to your expenses and figure out exactly where the money is going, and then redirect it. If you eat out five nights of the week, start cutting back and make plans to cook at home more often. Maybe you are paying for an expensive leased car when an older used one would serve your needs. Take the savings and use it to pay off debt, or start a "rainy day" fund. Money management may take awhile to prefect, but it's never too late to get started.
- Now it's time for the fun part: setting goals for yourself! Whether you want to retire at 45 or stash enough cash for a month-long Caribbean vacation, a budget can help you move forward to meet your goal. Once you've identified an important financial goal you want to accomplish, look at your expenses and locate areas where you can decrease your spending. Write a check to yourself once a month for the amount of money saved and deposit it in a special account earmarked for your big achievement. You can also challenge yourself to save money by setting an upper limit on your expenses for the month, and then monitoring your spending to meet or fall below that limit. This is a great exercise for anyone who wants to trim fat from the bottom line, and it can open your eyes to what you really spend.