Money Matters Monday: How to Establish a Realistic Budget
The best way to track your spending and to ensure that you have enough money for your day to day needs is to establish a budget. A budget will provide an accurate picture of all the funds that are coming in as well as what is going out. This will allow you to have a complete picture of your financial situation and will assist you in making key decisions around spending. Below are the basic instructions for establishing and maintaining a budget.
The first step in establishing a budget is to determine the amount of money or funds that you have coming in. Look at all sources of income including but not limited to: paycheck, alimony, child support, dividends from investments, and interest computed on a savings or checking account. Lay out all of the incoming money along with the frequency. For example, you may get a paycheck every two weeks but the interest on your banking accounts is reflected in your account once per month. This will provide an accurate picture of the money that is available to you on a monthly basis. See below for a picture of what your list could look like.
There are many online tools or apps that can be used to establish your budget including QuickBooks, Excel and Mint.com. Most budgets are fairly simple and straight forward so Excel or even a paper and pen will suffice.
Now that you know the amount of money you have coming in, you will need to document all of your spending and bills for a given month. Usually I start with housing and all associated costs, for example, mortgage/rent, taxes, home insurance, water/sewer, electricity, heating gas/oil, and cable/internet/phone. Next I consider other critical bills such as car payments, car insurance, tuition, student loans and credit card bills. After these fixed payments have been established, I consider the budget for items that are necessities such as food shopping, gasoline, bus/train passes, clothes, school supplies and school activities (sports). Now you will have an overview of the cost of your necessities. Lastly document the budget for the wants, items that fall into this category are entertainment (movies, books, magazines), food (take-out, school/work lunch, morning coffee) and shopping (purchases above and beyond the basic needs). After you have documented your spending, your list should look similar to the picture below:
Now you should be able to look at your incoming versus your outgoing to determine if you have funds left over. In our example, there is an extra $838.00. It is important to determine what to do with the extra money each month. In this scenario I would recommend that $500 of the $838 is deposited into a savings account. Because items on the outgoing side may fluctuate from month to month, you may need to spend part of the extra funds on necessities (for example back to school clothes and supplies shopping will happen in September but not any of the other months).
Deciding what to do with extra funds is a optimal situation to be in but that is not always the case. If, after this exercise, you find that your incoming money is not enough to pay your bills, the next step is to determine where you can save money. For example, make coffee or lunch at home rather than buying it at work or call your utility company and see if you can take advantage of a budget payment plan.
The goal of your budget will be to accurately portray your spending and then establish a method to support a savings account and/or emergency fund. After you have completed the budget, be sure to refer back to it often to ensure your spending is on track. Also be sure to update the budget anytime your financial situation changes. A well documented budget is one of the strongest tools that you can use to keep track of your financial health.
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