Part One - Gathering Your Information
How much did you spend last month?
How much should you be spending?
When should you spend it?
How much do you need to save for "it"?
Why do you have "more month than money"?
The answers to these questions come from a well-managed budget. But first, what is a budget?
A budget is a listing of your anticipated income and expense for a time. The key word in this definition is anticipated. So simply put, a budget is a look into the future. Not just any future - your future.
There are rare people who can manage their financial affairs without the need of a formal budgeting process. However, even then there is some informal mental process that they use. For those of you who are not so gifted, a formal budget process will keep you on the "straight and narrow" and aid in the accomplishment of your financial goals.
Before you start though, there are a few things you need to understand:
First, preparing your first budget will take a little time because before you sit down to "map it out" you should find out how you are already spending what you have. That means you have to track your spending habits. Take a pocket-sized notebook and for a month write down everything you spend your money on. This will let you know exactly where your money goes. Are you employed? Then income is easy; you'll have a paycheck.
Second, your budget should give you the most "bang" for your buck. In other words your goal is to live within your means so you'll have money for savings, investment, replacement and maintenance costs.
Third, your budget is a path to financial security. You'll cure the "more month than money" trap.
Fourth, a budget is a guide ‑ not cast in stone.
Now that I have discussed what a budget is and what it can help you do, let's get into creating your own household budget. Since a budget is a comparison of your income and expenses, the first step is to estimate your income.
Income is of two types, uniform and variable. Also your income is either dependable, or not. If you work for a company your income is probably uniform ‑ you receive the same base pay each period. If you are self-employed your income is variable; you earn it but it's not always the same or received in regular intervals. Whether or not your income is dependable is subject to many factors; your seniority, your company's strength and place in the industry, and economic factors, to name a few. Because most people's income is uniform, estimating weekly, monthly and annually is relatively simple. Work with your take home pay and not gross pay. Also, do not include overtime or anticipated raises in this income estimation. Better to receive unanticipated income than to hope for income that does not materialize. After you have determined the income for the year it is now time to estimate your expenses.
Expenses are of two types fixed and flexible. Fixed expenses are the same each month and ones you cannot miss or change. Examples of fixed expenses are rent/mortgage, auto insurance, and loan payments. Flexible expenses allow you more options and may not need the same level of spending each month. Examples of flexible expenses are food, clothing, entertainment and pocket-money.
When pulling together your estimates for your expenses it is wise to check your past spending habits. What you see depends on which life stage you are in. Now a word about life stages; a budget is a reflection of you and your spending habits. Realize that no two budgets are exactly the same. Your life stage affects how your budget appears. Some of these life stages are the single adult, the young married, child rearing, and retirement/old age. Be aware of your life stage and understand the needs of that stage in the construction of your budget. Understand too that yours may not fit into a "typical" life stage profile.
When you have determined the sources and types of income, and your fixed and flexible expenses, it is time to list them all in a budget schedule. I'll show you how to do that in Part Two.
For more information on budgeting and spending habits, visit these sites:
Always Frugal
http://www.alwaysfrugal.com/household_budget.html
5 Steps to Healthy Spending Habits
http://www.ec-online.net/Library/personalfinance/5steps.html
Compare Your Spending Habits to the Rest of the Population's
http://mashable.com/2010/07/02/bundle/
Are Your Spending Habits Healthy? - Quiz
http://www.sparkpeople.com/resource/assessment_questions.asp?quizid=57
Three Easy Steps to Determine Your Financial Priorities
http://moneyning.com/money-management/three-easy-steps-to-determine-your-financial-priorities/
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