Every successful business has a budget. The United States as a nation has a budget. Therefore it only makes sense for individual households to maintain one too. But for those who have gone for years without a budget, and for those who have never developed one in the first place, getting control of your financial life can be an overwhelming task.
This week we will look at budgets. For many people, a simple budget will work; for others, a more complex budget that tracks every expense will be needed. Regardless of which type of budget you need, it is important to know how much money is coming in as income, and how much is leaving as expenses. This will allow you to sit down and figure which expenses can be cut, and how to contribute more to your savings, retirement fund, or help accumulate cash for a big purchase.
Tracking income is the first step. This will give the budgeter a handle on just how much money is coming in. While it may seem simpler to say, “I make $50,000 per year, so that’s my income” budgets do not work that way. It is important to keep track of how many dollars are brought in after taxes. This means any freelance income is added, as well as any gifts, winnings, earning from odd jobs, and all income from a regular paycheck. Every single dollar must be accounted for and written down (a spreadsheet works well, more on those in following articles). The simple budgeter will be able to have one entry for income. Those who want or need a more complex budget will need to write each income source as a separate entry. Keeping track for a month is the minimum a person should do; keeping track each month for a year will make for a better budget.
Equally as important as tracking income is the act of tracking expenses. Just like income, all expenses should be followed closely for at least a month. While the simple budgeter may be able to get away with marking down how much was spent on each category (groceries, utilities, etc.) throughout the month, most people will find it beneficial to save their receipts in order to add up exactly where they were spending money, and on what products. Remember, the more detailed the budget, the easier it will be to analyze and figure out where money is being spent unnecessarily.
The first thing to look at when analyzing you budget is to see if you spend more money than you bring in. Or do you make more than you spend? While it may seem obvious, many people do not know their net monthly income. Even a simple budget will help anyone become more aware of the money coming in and going out, and the first step to budgeting is being aware. The best way to understand exactly where the money is going each month is to use a guide to map income and expenses. Our next budgeting article will look at doing just that.