Does the thought of budgeting make you shudder? Do you think you need complex formulas or advanced software to create a good budget? Don’t worry! There’s nothing mysterious about writing down your income and expenses to see where your money is going. Once you understand the three simple parts of a budget, you won’t have any problem creating your own.
The first section of a good budget should be your income. Include all sources of income that you can use for giving, saving, and spending. It helps to have three columns for your information: one to give it a name, another for the average monthly amount, and a third for the yearly amount. You’ll use this same format for your expenses as well. If your income is irregular, figure out what it usually is for a year and then divide by 12 to get an average monthly amount. List all sources of income you can think of. Anything you leave out is likely to be spent without a good purpose.
This is where you’ll list everything you spend your money on. The best budgets track giving, savings, and taxes in addition to the typical household expenses. You’ll also want to make sure every dollar is used for some purpose and there is nothing left (positive or negative) when you subtract your expenses from your income.
It’s easiest to start with your fixed expenses – the ones that don’t change (at all or by very much) from month to month. This usually includes rent/mortgage payments, insurance payments, some utilities, and debt payments among other things. You’ll usually be able to figure these out with little effort just by checking your bills or bank account for the past month or so.
Figuring out your taxes can take a little more effort, but it’s easy if you use a tax software program and good calculator. I like to use Dinkytown.net’s U.S. 1040 Tax Calculator for federal taxes. State and local taxes are usually straightforward and based off your federal AGI (adjusted gross income). Social Security and Medicare taxes are generally 7.65% of your income (or 15.3% if you’re self-employed) until you get over $110,100 (in 2012). After that you’ll pay only the 1.45% for Medicare taxes (or 2.9% if you’re self-employed). Recent legislation has reduced the employee’s portion of these taxes by 2.0% to 5.65% (or 13.3% if you’re self-employed), but this is currently a temporary cut through February 2012.
When you’ve determined your savings goals, it’s a good idea to place those in your budget as well. You’ll want to do the same with your giving – whatever you have decided in your heart to give, put it in your budget.
I left the variable expenses for last because they typically require the most work. These are the things like groceries, gasoline, some utilities, personal expenses, entertainment expenses, gifts, and other items that can vary from month to month. You might have to track your spending on these things for a couple months to get a good feel for how much you typically spend. Whenever you spend money on something in these categories, write it down or keep the receipt. Then figure out how much you spend on average each month for each item. These are also the items you’ll really need to watch when you’re trying to stick to your budget.
Finally, don’t forget to include irregular items like car repairs, some insurance premiums, taxes and fees, and medical expenses. Plan on setting aside a certain amount every month for these items even if you don’t need the money that month. This will help you make sure you have money available for those expenses and get you away from living paycheck to paycheck. Also, don’t forget those pre-tax deductions your employer is taking out of your paychecks. It’s good to know where every dollar of your money is going so you can be sure you’re managing it well.
What’s Left Over (…or Still Needed)
If you’ve given every dollar a purpose and are spending less than you earn, you shouldn’t have anything left over when you subtract your expenses from your income. If you find you have a lot left over, give it away or save it for a specific goal. If you need more to make ends meet, look at how you can increase your income or decrease your expenses. Don’t use credit cards or loans as a fix for your budget problems!
Get Started Today!
If you don’t have a budget already, right now is a great time to start putting one together. You’re not going to create a perfect budget today, but it’ll get better over time. You don’t need fancy software or websites to make your budget. Use pencil and paper or a simple Excel spreadsheet. I use a Google Docs spreadsheet myself.
You’ll find some detractors of budgets in the personal finance world. They say this because so many people find it difficult to stick to a budget. Now that’s a different issue from creating a budget, and I’ll address it in a future post. I’ll be the first to admit that sticking to a budget is not easy.
But just going through the process of writing down all of your income and all of your expenses can be a major eye-opener. Don’t worry so much about sticking to the budget at this point. I’ll give you some tips on that later. What you do need to realize is that this process is valuable – even if you fail to stick to the budget!
Whatever methods you decide to use, make your budget your own. Don’t worry about whether you’re doing it the “right way” – just do it! Once you have control over your spending and a thorough knowledge of where your money is going, you’ll be able to manage all aspects of your personal finances much better. Feel free to share your budgeting tips in the comments!
Great tips, Paul. I’m glad you mentioned things like “Irregular Items” in the budget. Too many people leave these things out of their monthly planning, and end up in a bind when some of those “unexpected” things happen in life. I’ve got a whole post on the topic over at my blog “God, Money & Me” —