Making a realistic budget is a cornerstone to building a good financial foundation for you and your family. It really doesn't have to be too detailed or restrictive, though you do have to make some tough decisions on how you spend your money.
- You need to know what your total annual income is, so list your income sources and total them. Generally most of us have a regular paycheck and your pay stubs tell you what your "total to date" income is for the year. Your IRS W-2 form from the previous year will also give you your gross earnings for one year. Check your income tax filing from the previous year and this should list other sources of income you had for a year, such as interest earned, stock sales, profit or loss from a business, etc.
- Divide your income sources into two categories -- regular income and variable income.
- Regular income will list the wages or salaries earned on a regular basis each month. (This is your gross wages or salaries before taxes.)
- Variable income is basically those items that generate income, but are not consistent in the amounts you earn on a month to month basis, such as money earned from stock sales, real estate sales, part time business, etc.
- Total all your annual expenses items.
- Divide your total expenses into two categories: fixed expenses and variable expenses for the year.
Fixed expenses are those items which we have to pay every month (even though some of these amounts will vary, such as utilities, they still have to paid every month). Examples of fixed items would be rent or house payment, food, loan payments, transportation cost (especially fuel), monthly parking fees, insurance premiums, federal and state tax withholdings, and utilities, as mentioned earlier.
Variable expenses are tough items to list. There are so many things we spend money on, on a daily basis, that it is difficult to itemize. Things like lattes, parking fees, smokes (if you smoke), donations for charities, etc. Make this list AFTER you have made your fixed expense list and have a figure for total FIXED income minus fixed expenses. An example might be:
Fixed Income items Annual totals
Wages or salaries $50,000
Less Fixed Expense items -$35,000
Total income remaining for variable expenses and savings $15,000
- Take your annual figures from steps 1 through 4, above and divide by 12 months. ($50000/12 mos.) This will give you a monthly budget figure for income and expenses. Based on above example, monthly income would be $4167 and monthly expenses would be $2916.
- Now subtract the monthly income from the monthly expenses. ($4167-$2916 = $1251) This will give you a total of $1251 for discretionary (variable) spending each month.
- Now you can make a list of variable expenses because you have a total of $1251 available each month. You can go into as much detail or depth as you want at this point. List things you know you will spend the money on like smokes, lattes, etc. Or a simplified method is to take the $1251 figure and divide it by 30 days in a month ($41.70) and allow yourself to spend this amount on your many variable expense items.
- If you are paid monthly, take the $1251 as a cash withdrawal from you check, separate into 30 envelopes and take an envelope with you each working day. If you don't spend anything that day, then you can add to the next day or save it by putting it back in the bank. If paid bi-weekly, then divide $625.50 and use step 7. If weekly, then $312.75 and use step 7 envelope process.
This method helps you control your spontaneous purchases, because when the envelope is empty you have spent your daily allowance. Don't defeat your budget by using a debit or credit card when you run out of cash for the day. (Unless it's an emergency... A nicotine or coffee "fix" does not qualify as an emergency!)