Using a budget, which is a simple money management tool, can help you focus on meeting your financial goals. The first step in developing a budget is understanding how much money is coming in and how much money is going out. Follow the simple steps below.
- List your monthly net income – This is your income after taxes, insurance deductions, and retirement savings deductions (in other words, the amount of your paycheck). Be sure to include income from other sources, such as alimony, child support, or income from a second job or freelance work.
- List the amount you deposit into your savings account – Pay yourself first! Budget for a regular deposit to savings.
- List your monthly fixed expenses – These are regular expenses that don’t change from month to month - such as, charitable giving, rent, mortgage, utilities, cell phone, car payment, and insurance.
- List your monthly variable expenses – These are expenses that you need to incur (see the note below on the difference between needs and wants), but change from month to month. You typically have some ability to control the amount you spend for these. Two examples include groceries and clothing.
- List your monthly discretionary expenses – Discretionary expenses are expenses for things you don’t “need” and can control - such as, eating out, movies, gifts, and upgrading your phone.
- Add up your cash outflow (#2 through #5)
- If your total cash outflow is more than your net income (#1), review your expenses to see where you can reduce them. Be sure to check your fixed expenses for potential savings; you may be able to reduce your cable and phone bills or your utility bills.
- If your total cash outflow is less than your net income (#1), give yourself a pat on the back!
- Readjust your budget as needed
- Make it realistic. If you can’t stay within your budget, it is not a useful tool.
- Be sure to modify your budget as your situation changes.
Needs versus Wants:
As you are reviewing your budget, it’s important to be clear about which expenses are necessary (needs), and which are discretionary (wants). This will help you evaluate your budget and determine how to balance it.
It can be hard to decide whether an expense is truly a need or just a perceived need due to lifestyle or peer pressure.
- What is a Need? – Needs consistent of “absolute” necessities and “living” necessities. Absolute necessities include the basics of food, shelter, and clothing. Living necessities are those expenses needed to survive in today’s society – utilities, phone, transportation, childcare, insurance, and expenses necessary for your work.
- What is a Want? – Wants are basically all other expenses. These include discretionary spending such as entertainment and vacations, as well as spending for more expensive versions of your needs – phone upgrades, more options on your car, and designer clothes.
Your income should cover your needs and allow you to afford some, if not all, of your wants. Having a budget will allow to your prioritize your wants and manage your spending.
Check out the budgeting resources on the right of the page. Try a couple to see which tool works best for you. Remember, paper and pencil work too!
Tips & Resources - Budgeting
Try reducing your monthly fixed expenses by:
- Reducing the number of cable channels you subscribe to or the data package on your phone service. You may find that you are paying for channels or data you aren’t using.
- Changing the temperature on your thermostat. Just one degree can make a difference!
- Don’t use credit cards to bridge the gap between your monthly income and expenses. Reduce expenses or increase income to balance your budget.
This material is for informational purposes only and is not intended as investment, tax, financial, legal or other advice. Your personal decisions should be based on the recommendations of your own professional advisors.
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