How to Create a Personal Budget

Budget Guidelines

Most people agree that a major corporation needs an operating budget to be successful. Yet many of those same people may not realize that a personal financial budget is just as crucial at home. A personal budget is simply a plan. It allows you to decide if you can truly afford purchases and enables you to set aside money for savings and retirement. A budget can act as an early warning system-as you compare your actual spending to your budget you can see where you need to make adjustments before you get into serious financial trouble. Budgeting also relieves a lot of financial stress since it can assure you have money to cover everything for the month-assuming, of course, that you follow your budget.

A monthly budget is often the most useful. Use past figures of income and expenses to estimate your monthly budget for the coming year by reviewing your checkbook (or Quicken or Microsoft Money records) for the past twelve months. Some expenses and income items are seasonal or irregular like property taxes (see my article on lowering your property taxes) or dues. Allocate a monthly amount to set aside by dividing the annual amount by 12. What your are shooting for is an estimated picture of your future cash flow.

Listed below are average percentages per general expense category. They are meant as guidelines and suggested maximums.

Average Percentage of Gross Income

Housing + Utilities 25%-40%

Taxes (actual) 20%

Transportation + Upkeep 15%

Food 10%

Clothing 5%

Savings 10%+

Entertainment & Vacations 5%

Debt (credit cards, loans) 5%

Other expenses 5%+

Some expense (and income) items are not easy to figure; food expense is usually one of these. Put down your best estimate. You can always adjust it later. When you have all income and expense items listed, subtract expenses from income. You should have a positive amount remaining; this is your bottom line and cushion for unforeseen expenses. Your goal is to live below your means. A negative bottom line is a sign that you need to work at reducing your expenses or if possible increasing your income. It is often possible to reduce your living expenses without reducing your standard of living. Here are some things to consider:

Eat out less. Eating at home is less expensive and healthier. That means take your lunch to work, too.

Write letters or send e-mail instead of calling long distance. If you do call, make sure you call when rates are lowest.

Bundle your insurance. Many insurance companies offer a multi-policy discount if you carry all of your policies with their company.

Do you really need the cellular phone? If so, can you switch to a less expensive plan?

Comparison-shop auto insurance to see if you can reduce your premiums.

Clip grocery coupons and use them.

Don't buy anything unless it is on sale.

Go to the movies in the afternoon-matinee tickets are less expensive.

Shop at resale shops for clothing.

Do you really need all those movie channels you pay extra for?

Don't go to the grocery store or the mall without a list of what you need. If an item isn't on the list, don't buy it.

If you tend to buy on impulse, go home, wait three days, and the urge will likely pass.

Keep your credit cards at home rather than in your wallet.

If you have mystery cash (don't know what you spent all that money on) try this: write down a description, the date, and the amount of every transaction for three months. After each transaction, indicate if you paid cash, wrote a check, or used a credit card. By recording when and what you bought and how you paid for it you'll find out how and where you spend money.

Once you've recorded three months spending history, compile the information into a cash flow statement. This will show you from where your money is coming from (cash inflow) and where it is going (cash outflow).

You Have a Budget, Now What?

Each month, compare your actual income and expenses to your budget. Write down the differences between your actual amounts and your budgeted amounts for each category. Monitor your actual versus budget each month to make sure you are sticking to the goals you outlined in your budget.

Create a reward system. Developing a budget and sticking to it does not have to be dull. For example, after you and your family have reached a goal, such as saving for a much needed new dishwasher, enjoy a night out on the town. This helps your budgeting process to be more rewarding.

Hint: If you are very disciplined and pay your credit cards off every month, consider paying some of your recurring bills by credit card. While conventional wisdom indicated that using credit cards to pay your utility bills is a warning sign, if you have a card that offers rewards and you can pay it off every month so you don't incur any interest expense you can make some money or earn rewards points for bills you pay every month anyway.

Read the next article in the series, How to Save Money and Understand Investment Options.

Source: http://www.stcsig.org/cic/OnlineBook/c17intro.htm