Establishing a budget is the basis of having a good grip on your finances. This easy three-step program can help you create a budget that's unique to your needs.
1. Figure Out Your Income.
To create a budget, start by listing all of your sources of income, including full-time and contract jobs, interest income, rent on property you own, alimony, and child support for an average month. Be sure to list after-tax figures. Estimate on the low side and don't include income you can't count on.
If your paycheck does not come monthly, you'll need to do some math to figure your monthly pay:
- For weekly checks, multiply by 4.333
- For checks received every two weeks, multiply by 2.167
- For checks received twice a month, multiply by 2
- For irregular annual income, divide by 12
2. Review Past Expenses.
Review your checkbook registers, credit card statements, receipts, and bills, and create a list of your expenses for an average month.
Start with fixed expenses, such as your rent or mortgage, where the payment amount is the same each month. You may want to include periodic expenses (those that are paid less often, such as life insurance payments or car registration fees) by dividing them into monthly costs.
Next, figure in variable expenses such as phone or utility bills, transportation, groceries, eating out, clothing, childcare, home care, and entertainment. These expenses may change from month-to-month. Find the average and remember to include a figure for that pocket cash that seems to just "disappear."
Now, add the fixed and variable expenses to calculate your total monthly expenditures.
3. Figure Out the Difference.
Subtracting your total expenses from your income will give you your budget starting point.
If the sum is below zero, it's time to trim your variable expenses. Some expenses are more easily trimmed. For example, you need to make the house payment and get groceries, but you may be able to go without seeing that new movie. Cutting back is usually a better place to start than cutting out.
And don't forget: you should consider setting aside a portion of your net income for savings. That way you'll be prepared for extra costs like an unplanned auto repair or a future vacation.
After you've created your budget, you need to keep records of your actual income and expenses. This information helps you to understand any "budget variances" -- the difference between the amount you budgeted and what you actually spent for the month.