Budgeting
What you need to know about making a budget
Budgeting can help you make the most of your money by tracking your spending. They expose problems in your spending patterns and help you save money towards big-ticket purchases while making it easier to live within your means.
Personal Budgeting Basics
There are three basic reasons for using a budget:
- Keeping track of earnings, spending and savings
- Planning for future expenses
- Tracking progress toward meeting financial goals
When creating budgets, it is best to plan on a monthly basis. Weekly budgets are too frequent, and a year is too long.
Go through all of your sources of income and your expenditures, and figure out how much you make and how much you spend per month. For expenses that are seasonal or quarterly, calculate the annual cost and divide by 12. Take your time so that you don't leave any expenses out, and be sure to include inexpensive but frequently purchased items like your morning coffee and daily newspaper.
Do not forget to include a category in your budget for savings; studies have shown that if you allocate a set amount for savings each month, you are more likely to actually put that money away. A good goal for saving money is to put away 5 to 10 percent of your gross income. This is an important category; everyone should have savings. Having a little money in the bank comes in handy on a rainy day and helps you work towards your larger financial goals.
After you have carefully listed all your sources of income and all your expenses, total them up and crunch the numbers. Subtract the total of the expenses from the total of the income to see how much money is left. Hopefully, this bottom line number is positive; if so, it means you have more money to put into your savings. If the number is negative (a "budget shortage"), this means that you are living beyond your means and could shortly find yourself in serious financial trouble.
If you have a budget shortage, you have three options:
- Reduce your expenses
- Increase your income
- Use money from your savings (not recommended!)
Tools to Help Manage Your Budget
There are several excellent personal finance software programs which can help make the budgeting process simpler and faster; some even offer free trials of their programs. Two of the more popular budgeting software titles are Intuit's Quicken and Microsoft Money. These programs are very user-friendly and offer powerful tools to help you keep tabs on your income and expenditures.
