At first, it may be painful to do this. However, once you develop a monthly budget, it’s extremely easy to track and analyze.
The principle behind having a monthly budget is simple: each month, more money must come in than goes out. There is no alternative; you can’t spend more than you make. I know this is contrary to how our government and most Americans manage their finances. However, if you adhere to the budgeting process explained (and shown) over the next few pages, you will become financially secure over time.
The simple act of developing, tracking, and analyzing your monthly budget will result in sound fiscal management.
So, let’s break the process into these three parts:
1.Develop a budget—List all your expenses and all your income, and account for them in your budget.
2.Track your budget—The first day of every month, summarize your performance against last month’s budget, and prepare this month’s budget. Once you have done this a couple of times, it will take you next to no time at all to manage.
3.Analyze your budget—Look at your budget and see where you are doing well and where you’re not. Make the necessary changes that allow you to save more money.
In order to understand budgeting better, let’s look at the first step, developing a budget.
To develop a budget, you need to estimate (1) what is going in your pocket (income) and (2) what is coming out of your pocket (expenses) every month.
Let’s look at what is going in your pocket:
1.Salary—Look at the after-tax dollars in your paycheck.
2.Bonus and commissions—If you are eligible to receive this, it will have to be an estimate (in after-tax dollars). I usually don’t include it and end up saving the “surprise” income.
3.Dividends and interest—Estimate this based on your prior year’s investment history.
4.Gifts—You usually receive these only on birthdays and holidays (and they go away as you get older).
Now, let’s estimate what is coming out of your pocket. Major expense categories include the following:
1.Housing—Mortgage or rent is usually your biggest expense. However, you can’t forget property tax, insurance, and estimated maintenance/repairs. Renting will usually eliminate some of those expenses.
2.Utilities—It’s amazing how many “support services” are needed to run your house. Electric, gas, water, garbage, cable, Internet, and phone services are the major utility expenses.
3.Automobile—Until you can purchase your car with cash, your major automobile expense will be your car payment. However, you will also need to include insurance, gas, parking, maintenance, and repairs. If you’re smart, you will also start a fund that enables you to purchase your next car with cash.
4.Food—The two major expense categories here are groceries and restaurants.
5.Entertainment—My example includes movies, sports, clubs, vacations, electronics, and cell phone service. This works for the individual in my example, but you definitely need to personalize this area for yourself (depending on your personal entertainment habits).
6.Miscellaneous—Here, I lump together any items I didn’t account for in other categories. Include expenses like gifts, supplies, and toiletries, but personalize this category based on your own habits.
7.Other insurance—This is where you need to account for health and life insurance payments. I used this category as a catchall for health care expenses, so I include physicians, dentists, optometrists, prescriptions, and any other health care-related expenses I have.
8.Other loans—In addition to loans included in other categories (home and car), you may have student loans or credit card debt. Include both of these in this category.
9.Charity—It’s nice to have this one broken out. It makes you think about giving not only money but also time to various charities.
10.Savings—You need to have this in your budget, even if it’s $0 when you first start out. This is one of the main reasons you are budgeting: to find a way to save money every month.
11.401K fund—If a 401K is available with your employer, this is another forced savings method you need to use.
12.Emergency fund—Do you have money in case of an emergency? You need to. We’ll also discuss this in a later lesson.
Now let’s look at an example of a budget that takes into account all the categories we just outlined.
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