How to Build a Budget
A budget is a very important tool structured to help control your spending made to work toward your financial goals. Budgets are a financial summary of income and expenses over a defined period, such as one month, quarterly, biannually, or yearly. The typical household budget is over a one-month period. A budget shows you the expected amount of money brought in throughout the defined period. After the expected income, the expected expenses are recorded. With a budget, an individual can track the expected spending and savings over the defined period. With a proper financial plan, an individual can spend more in some areas while spending less in the less important areas. With proper budgeting practices, you can allow for planned savings and larger purchases when needed. Overall, the purpose of a budget is to show you where your money is coming from and where it is going over a period. The basic steps to creating a budget include:
1. The first step is to gather all financial statements. These statements could include bank statements, receipts, utility bills, pay stubs, loan information, etc. The more information provided, the better when building an average over multiple months.
2. Next, you will want to calculate your income. This should be the total take-home amount after all deductions are made.
3. Then you will want to make a list of all monthly expenses which can be expected over a period. This could include insurance, groceries, utilities, entertainment, transportation, savings, loans, etc. To gain a rough idea for future expenses, you can average the past three to four months.
4. After all expenses are accounted for, you can divide them between fixed and variable expenses. Fixed expenses are mandatory payments made at the same rate such as mortgage or service fees. Variable expenses are rates that will change from month to month, such as groceries, gasoline, or entertainment.
5. Once all income and expenses are accounted for, find the total income and expenses for the period. If income is higher than expenses, it is a good start; however, if expenses are higher than income, there is work to be done.
6. Finally, make the necessary adjustments to the expense category. In situations where expenses are higher than your income, begin by looking for areas to cut costs. This could include eating out less or shopping more frugally. Theoretically, it is ideal to have income and expenses be equal to properly account for where all money is going. Continue to monitor and adjust your budget for an ideal financial standing.
