Budget Basics
What is a personal budget?
An effective budget is a financial plan based on income, debt, and savings which limits monthly spending in each category of expenses. Although the term “budget” is used loosely in our day-to-day language, most people do not have a personal budget to monitor their financial spending. When addressing certain luxuries, many folks will say something like “that type of car is not in my budget.” Conversely, some people spend impulsively without any consideration to income or debt.
Why do I need a personal budget?
In today’s society, it is common to pick up a $4 Starbucks in the morning, drop another $10 on a semi-fulfilling lunch, and possibly spend extra money on a newspaper, snack, or other needless item. At the end of the day, $20 has disappeared, but where? If you have taken money from the ATM only to notice a day later that it has been spent on a mystery item, a budget may be the perfect way to leash your spending habits. The long term benefits of creating and adhering to a budget include reducing or eliminating debt and retiring in a financially comfortable lifestyle.
How do I create a budget?
Creating a budget can seem tedious or unnecessary to some, but again, the long term benefits should outweigh any excuses or annoyances. Creating a budget involves five basic steps, which are outlined below:
- Monthly Income. List all of your monthly income, including but not limited to side jobs, settlements, etc. If you have an annual income, divide it by 12 to provide a monthly dollar amount for your budget.
- Monthly Expense. Execute the same exercise as above, but this time, list your debts. If you have a debt such as car insurance or maintenance which is less frequent, prorate the expense to determine a monthly cost.
- Subtract. Do your expenses exceed your income? If so, you will need to reduce spending. If not, take this opportunity to reassess your goals, harness your spending and save for that trip to Italy in which you have always dreamed.
- Adjust. Change your spending habits to meet your new goals. Maybe you could save $20 a week by cutting out your $4 coffee habit. If your goals require larger financial sacrifices, consider downsizing your home or consolidating your adjustable mortgages into one low fixed rate mortgage.
- Prepare. Create an emergency fund to cover those expenses that arise unexpectedly. This will allow you to maintain your budget and still pay for the surprise expense.
For more information on the advantages of a personal budget, check out Marc's Budget Benefits.
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