Creating you first budget is often time-consuming and stressful. Talking about who is spending money on what often brings forward basic disagreements about household finances. A Second reason for not making a first-time budget is that it often reveals problem areas. Many households overspend. The Journal of Consumer Research (April 2011) indicates that in 2008 Americans’ spent 9.3 percent of their income servicing debt. In 2010 over 24 percent of homes in the United Sates had mortgages that were higher than the homes were worth. The report goes on to state that interviewees espoused that they should limit their debt, but would take on significant debt because doing so was normal. However, having a budget (or a “spending plan”) is the first step to building wealth and avoiding out of control debt. The following is a Step-By-Step Guide to Creating Your First Budget:
1. Gather all your financial information. Some monthly or annual payment amounts you’ll know immediately. Other expenses are difficult to track. To make this first step easier, focus on the major recurring income and expense categories. You can use the Sample Budget Template to enter your annual dollar amounts earned and spent. Items that you should easily remember are:
a. Rent/mortgage payments
b. Auto payments
c. Utilities
d. Credit and bank card payments
e. Food at home expenses
f. Contributions to retirement accounts or investment accounts
g. Life, health, disability, long-term care, insurance (that is not automatically deducted from you salary)
h. Transportation including auto insurance premiums
i. Taxes (semi-annual real estate and personal property taxes)
2. Calculate how much money you earn each month. This includes regularly occurring salaries, part-time salaries, reimbursements, self-employment income, retirement and investment income
3. Use The Sample Budget Template to assist you in dividing your expenses in non-discretionary (the necessities) and discretionary expenses (the luxuries).
a. Non-discretionary expenses are your fixed (for example, rent or mortgage payments) or near fixed (such as semi-annual property taxes, pets, personal care) costs.
b. Discretionary are luxury expenses or expenses that you have complete control over.
4. Use The Sample Budget Template as an example format for your annual budget. Using the same or similar categories enter the dollar amounts that are your actual amounts. If you are uncertain of actual costs enter your best “guess estimate”. (You can find tune your personal budget amounts over time.)
5. Enter the amount you pay in payroll taxes and other taxes. This will assist you in determining after- tax income.
6. For planning purposes you may want to budget for three to five years to determine if you can reach a long-term financial goal. This is especially useful if you know that you have to make a major capital expenditure. For example, the down payment on a house, buying a new furnace, or repairing the roof.
7. Make certain that your budget is flexible and adaptable. To be successful, a budget takes commitment from each family member. Therefore it is important that everyone “buys” into the spending plan you have all created.
8. Fine tune your annual budget into a monthly budget. Compare your monthly actual to your monthly budget and determine the difference. You will likely discover “money leaks”. Please refer to the Top Three FAQs about Budgeting and Personal Finance for suggestions about how to stop money leaks and advice for staying on budget.
9. It is often difficult to keep track of “pocket change”. Walking around money can quickly add up to hundreds of dollars spent each month. One way to keep track of where this money goes is to keep an envelope in your car or purse. Write the month in the corner of the envelope. When you pay cash, list what you purchased and the amount on the envelope. If you pay for an unusual expense put the receipt in the envelope. This will help you remember what you purchased. At the end of the month, you can reduce the number of unassigned personal expenses by categorizing the items listed on your envelope.
10. Calculate your total expenses.
11. Subtract your total expenses from your income. The difference is your net discretionary cash flow. This amount can be used towards achieving your financial goals.
In conclusion, it is important to get started today. Understand that your first budget won’t be “on the mark”. Your budget will be subject to small changes and revisions. The budget will likely not be accurate until it has been in place for three to four months.
