Bank, and Barclaycard, among others. Creating your first budget can be extremely overwhelming. When I built my first budget several years ago, I knew approximately how much money I was making annually, but I had never broken down my expenses by category to figure out what I could afford on a recurring basis, or how much money I could regularly invest. In short, I was spending money on the things I needed and wanted without determining first whether I could truly afford them. After overdrawing my checking account once or twice, and having to pay several bills with credit cards because of my lack of a working budget, I decided to get real and begin a budget.
Decide to Start a Budget If you are reading this article, chances are that you have already made the decision to begin a working budget.
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For many people, myself included, this is the hardest part. Read on to get started with next steps. Know How Much You Have If you have savings, checking accounts, investment accounts, or any other financial instruments, you will want to know how much money is in each account as well as the interest rates and expenses of each one. Make note of this information as it will become important in determining your net worth and the best use of your capital in the future.
Those on a salaried pay scale can easily find their monthly income. For hourly employees or those who work in a business where income may rise and fall unpredictably, this can be much more difficult. The most important consideration, regardless of how you earn your monthly income, is to determine the average monthly amount of income that you receive. A good way to do this, if you receive irregular income , is to average out the last 6 to 12 months of recurring income and use that figure. If you want to be extra conservative, you can choose the lowest monthly amount you have earned in the last year, which will hopefully provide you with a worst case scenario.
Know What You Owe Determining your monthly recurring debt payments should be your next step.
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This should be fairly simple to do, as long as you have stopped incurring additional debt in the short term. To find out what your monthly recurring debt payments are, calculate the total amount owed on each debt account as well as the minimum monthly payment. This includes car loans , mortgages, credit card debt, student loans , and all other debt that your family pays on a monthly basis.
This will provide you with the first few line items in your budget, and will allow you to determine your net worth. Determine Your Net Worth Once you know how much money you have and how much you owe, you can easily determine your net worth. Just subtract what you owe from what you have, and you will derive a number.
How to Make a Budget - 12 Personal Budgeting Tips for First Timers
This number will tell you the value of your financial resources. For me, this number was an eye opener. When I built my first budget, I had a negative net worth. I assume this is fairly common in America, especially for young people just starting out. The best way to determine your monthly expenses is to make a stack of household expenses for a month. Keep your receipts, your utility bills , and any other expense that arises during a one month period, and divide these bills into categories.
The categories can be as general or as specific as you want them to be. Either way works well, as long as you determine an average amount of expenses for each category. Enter this Information into a Database It used to be, if you had a budget, you had an old school paper ledger. Things have changed for the better for all of us new budgeters. Software programs like Microsoft Excel and online budgeting tools like Mint , You Need a Budget , and Mvelopes have made it much easier to take the results of your first few steps, and develop a highly adjustable and sustainable long term budget.
I use Microsoft Excel for my own personal budget, because it allows a greater deal of flexibility than sites like Mint. How simplicity is defined with regards to the use of budgeting categories varies from family to family, but many small purchases can generally be lumped into one category Car, Household items, etc. The budgeting process is designed to be flexible; the consumer should have an expectation that a budget will change from month to month, and will require monthly review. Cost overruns in one category of a budget should in the next month be accounted for or prevented.
Anticipating budget-busting events and underspending in other categories , and modifying the budget accordingly, allows consumers a level of flexibility with their incomes and expenses. Special precautions need to be taken for families operating on an irregular income. Households with an irregular income should keep two common major pitfalls in mind when planning their finances: Clearly, a household's need to estimate their average yearly income is paramount; spending, which will be relatively constant, needs to be maintained below that amount.
Of course, the better the estimates, the better the results will be. To avoid running out of money because expenses occur before the money actually arrives known as a cash flow problem in business jargon a "safety cushion" of excess cash to cover those months when actual income is below estimations should be established. There is no easy way to develop a safety cushion, so families frequently have to spend less than they earn until they have accumulated a cushion.
This can be a challenging task particularly when starting during a low spot in the earning cycle, although this is how most budgets begin.
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Whether this rate of building a cushion is fast enough for a given financial situation depends on how variable income is, and whether the budgeting process starts at a high or low point during the earnings cycles. There are several guidelines to use when allocating money for a budget as well. Past spending is one of the most important priorities; a critical step in most personal budgeting strategies involves keeping track of expenses via receipts over the past month so that spending for the month can be reconciled with budgeted spending for the next month.
Any of the following allocation guidelines may be used; choose one that will work well with your situation. Fixed expenses includes federal, state and Social Security taxes, insurance, regular bills and living expenses- like food and clothing, car and house payments. According to Jenkins, tracking each individual expense is unnecessary, as the balance of his primary checking account is roughly equivalent to the amount of money that can be spent in this plan.
To calculate, find income level, tax rate and mortgage interest rate. In housing markets with exceptionally high prices, such as California , New York City , London or Boston, Massachusetts , in the early s, this rule of thumb may be difficult to follow.
12 Steps for How to Make a Budget – Personal Budgeting Tips for First Timers
A high percentage of income spent on housing will necessitate lower percentages in other categories. One of the critical factors that many people overlook during the budgeting process is the "supplier-replacement cost-cutting technique". This is the process of scrutinizing each current expenditure, comparison shopping and replacing with a lower cost, equal quality alternative.
The newfound savings is then reapplied to debt, savings accounts and enjoyment spending. Once a budget is constructed and the proper amounts are allocated to their proper categories, the focus for personal budgeting turns to following the budget.
As with allocation, there are various methods available for following a budget. Envelope Accounting or the Envelope System is a method of budgeting where on a regular basis i. Then anytime you make a purchase you look in the envelope for the type of purchase being considered to see if there are sufficient funds to make the purchase. If the money is there, all is well.
Otherwise, you have three options: The flip side is true as well, if you do not spend everything in the envelope this month then the next allocation adds to what is already there resulting in more money for the next month. With envelope budgeting , the amount of money left to spend in a given category can be calculated at any time by counting the money in the envelope.
Optionally, each envelope can be marked with the amount due each month if a bill is known ahead of time and the due date for the bill. Budget spreadsheets with date-shifting typically offer a detailed view of a month, income and expense, plan. A good way to follow and manage a budget when using a spreadsheet that offers date-shifting is to set the current month a few months before the current month along the month cycle, month 4 for example.
In this way previous expenses and results can be viewed when creating or adjusting the budgeting planning. Once you have a budget it is also important to follow it and manage within the budget allocated. Pitfalls to watch out for are as below:. From Wikipedia, the free encyclopedia. This article is written like a manual or guidebook.