Friday, April 16, 2010

Budgeting Basics

I started studying personal finances when I was 12 (can you say nerd?)so of course by the time I got into my 20's I thought I knew it all. In my mind a budget was a list of all your expenses. Simple right? If you don't know what your expenses are take a look at your credit card and bank statements and you can see where most of your money is going. Then grab a piece of paper and write down where what your expenses should be for the next month.

You can also track all your expenses for a month. Tracking means that you write down everything you spend money on. Trips to the vending machine included. If you don't know where you money is going, you'll need to track it (another way of saying follow it) to find out.

For most of us, every month is about like it was the month before- financially speaking of course. But don't use the same budget month after month. There are some things that don't show up monthly- Christmas, birthdays, car insurance, taxes, etc. For some of these things you can start a revolving account for. For example, if you know you are going to need $1200 for Christmas, then every month you could save $100 towards it ($1200 divided by 12 months gives you $100.) Other things are less expensive so when you change your budget monthly, you can add it in. For example, a birthday party that will cost you $50, can probably be added in to the budget rather than saving up for it.

There is more to a budget than just expenses though. There is also the income side of it. So figure out what your income is as well. It's okay to estimate low, or average it out, but this is very important. Sometimes your income is less than your expenses meaning you are short on cash every month. Ouch. That is definitively something that you need to be aware of. Having a written budget can show you where to cut back. Cancel cable perhaps? Eat out less? Temporarily find another part time job?

There is a concept that my "brilliant" self once thought, was almost pointless. It's called a zero based budget. When it comes to managing your money, if you know about what your income will be, you can potentially "spend" all of your income on paper before you actually get the money. So you know you have a $1000 pay check coming in at the end of the month, you can sit down and decide that $800 is going here, $50 here, $75 there, and another $75 there.

A zero based budget gives you a plan for every single dollar of your income. I have met a lot of people that want help with their budget and then they want a $50 or a $100, or even a $200 slush fund left over. Just in case. But the question then is, in case of what? Usually the response is, well in case we want to eat out, or in case something happens and we need the extra money, or in case we underestimated something in our budget, things like that. All of those things should be in your budget though.

If you want to eat out, give yourself "x" amount to eat out with. Yes there will be an emergency, so start budgeting for one. And of course, budget high for variable expenses (expenses that vary from month to month)like utilities, cell phone bill, etc. And then budget a little bit in a miscellaneous category because you will forget to budget for something- especially at first.

Now the question is, why should you budget? Remember when we talked about money being like water. That's why you should budget. A budget lays down the pipe work to get the "water" (money) where you want it to go. If you don't have one, the money literally just flows away. You had no control of it.

Right now the average household income in America is $48,000 a year. If you make that from 25 to 65 (40 years) you'll have nearly Two Million dollars flow through your hands, yet you never developed a plan for how to spend it. And what if you only budget for some of it? Say 80% of it... well then you let $40,000 slip away. That's insane! If you're going to work hard for your money, then make your money work hard for you. Yes, every dollar of it.

Click here to see how to stick to a budget

1 comment:

  1. Very nice, Erica. Highly informative post. I enjoyed!