Most people I know don’t budget their personal finances, except in their head. Planning a personal or household budget helps you avoid overspending, though, so everyone should plan a budget for their weekly and monthly expenses. A budget does for home finances what a diet does for your caloric intake. When you spend money (or eat in the other case), you have in the back of your mind how the expense affects your budget. This doesn’t mean that a budget takes all the fun out of spending money, but it does keep you mindful of how that money spending affects your budget.
The problem is, how do you make a budget or plan your personal finances? It’s a little easier when it’s just you in the household, so let’s discuss a personal finance budget first. To create a budget, you need to know two things: expenses and income. That might sound simple, but it will take a little paperwork.
Making A Record Of Your Expenses
First of all, you’ll want to start making a record of your expenses over two or three month’s time. I would suggest two, so you can start to budget as soon as possible. Two months allows you to gauge your expenses over two months and draw some conclusions comparing two months, so you don’t over-budget or under-budget according to one unusual month of expenses.
Try to make the record as complete as possible, so you’re calculations will be accurate. Take it one week at a time in the following way.
- Start at the Beginning of a Month – Start your record at the beginning of a month and make certain to record the weekly dates one the paper, to avoid later confusion.
- Keep the Paper in Your Billfold – Keep your record with you at all times. Just fold it up and put it in your billfold or purse, because you won’t be able to remember every single expense when you’re home at night at the end of the day.
- Record Your Expenses Throughout the Day – Any time you write a check, pay cash, or charge on your credit or debit card, make a record. Record your ATM expenses, though don’t double-bill if you use that ATM money to pay your expenses throughout the day.
- Start the Process Again Next Week – The next week, get out a new sheet of paper and go through the same process. Remember to keep your original sheet of paper in a place where you can find it.
- Record Monthly Bills During the Week They Are Paid – This way, they get recorded one time. Make certain to account for all monthly bills, like car payment, house payment, utilities, credit cards and fuel cards for each month.
- Continue Through a 2-Month or 3-Month Period – Keep this weekly record throughout a two or three month process. When you’re finished, figure out your average monthly budget.
- Factor in Yearly Payments – When you have an average monthly budget, extrapolate this out over a 12-month period. Then record yearly expenses, including property taxes, insurance payments, car registration, magazines subscriptions, income taxes and special once-a-year holiday expenses, such as Christmas gift bills.
When you have completed Step 8, you should add this to the total for a 12-month period according to the numbers from Step 7. This gives you a yearly budget. Now that you have this, figure out your income.
Budgeting Your Personal Income
Budgeting your personal income should be a lot easier than figuring out expenses. Most people have income from their job, a few bonuses throughout the year and maybe a side job or two through the year. Others might have pension money, alimony, child support or interest from savings account and investments. Whatever your income is, factor every bit of money you acquire in a year.
Now that you have a yearly income figure, divide this by twelve to give you an average monthly income. Compare this to your average monthly expenses. When you compare the two, you should begin to realize the state of your personal finances and how much budgeting is required for you to live within your means.
If your personal income is higher than your personal expenses, then your personal finances are in pretty good shape. People wanting to save money for retirement might want to tighten up their budget, so they can save more money for the future. Those with higher monthly expenses than higher monthly income should figure out where they can trim their budget and get their personal finances under control. This usually requires the elimination of certain discriminatory spending, generally known as “disposable income”. Disposable income is generally entertainment expenses, such as concerts, movies, sporting events, but can also include excessive clothing, expensive dining or trips out of town.
This isn’t the only way to budget better personal finances. It’s just the simplest way. You can find cheaper housing or rent, a car that doesn’t use as much gas or begin to pay off debts on things like student loans and credit cards. In the end, planning your personal finances might require some tough choices, but most of the time, you’ll know best what needs to go or what you personally can do best without.