Budget planning is absolutely crucial to controlling your spending. With a budget, you can see how your money flows. In other words, you see how much you take in relative to how much you spend. This information helps you make good decisions on how best to use your money.
Begin by Tracking Your Expenses
The first step in budgeting is to determine where your money goes. So, start by analyzing your expenses. These expenses include the checks you’ve written, credit card charges and cash purchases.
You can make your expense record by using the tried and true paper method to list your expenses. You can always transfer your budget planning to more sophisticated computer programs if you prefer.
Start with a single sheet of paper to record your expenses each week. Do this for an extended period, such as two months, so your budget reflects typical expenses. In other words, you don’t want to base your budget on shorter periods of time in which you had higher or lower than normal expenses.
Categorize each week’s paper by days of the week and record every purchase you make and expense you pay. Make sure to include everything in your budget planning list.
At the end of your two-month recording of expenses, you should list your periodic expenses that you did not incur during this time period. Examples of these types of expenses include property taxes, car registrations, subscriptions, insurance and seasonal expenses. The goal is to be as comprehensive with your budget planning as possible and not overlook any expenses.
Add Your Income
After you’ve listed your expenses, you need to include your income in your budget planning exercise. On another sheet of paper, tally your salary, any self-employment income, bonus pay, investment income like dividends and interest, any alimony or child support, public assistance, retirement benefits and any other source of money you have coming into your household.
Only list the net amount of money received, not the gross amount. If your income amounts vary, average them over a 12-month period. You need to arrive at the average amount of income you receive on a monthly basis.
You’re Ready to Develop a Budget
Budgets help you control overspending and help you save money. Using your lists of expenses and income, you can determine whether you’re living within your means. If your expenses exceed your available income, you only have two options: cut your expenses or increase your income.
Your list of expenses can help you identify areas for cutting back. You can often save money in your budget planning by eliminating some restaurant or entertainment expenses, for example.
The hardest part of budget planning is staying on track. If you find you overspend in a particular area one month, you may be able to cut back in another area of your budget. The goal is to maintain some flexibility so you don’t get frustrated and abandon budgeting altogether.
Budget planning is a great way to accomplish your financial goals and avoid getting into money trouble. You’ll be able to clearly see where you’re spending too much and identify areas you can cut. The key is to know exactly where your money is going and account for all your financial transactions.