What's a Budget Anyway?
A budget is simply a financial plan – a way to see where your money comes from and what it's being spent on. By keeping track of where the money goes, you can make sure all your bills are being paid, and that you have some left for unexpected expenses and saving for the future.
How to Write a Budget
Different methods will work for different people. Some may prefer to have it all written out on paper. Some prefer an electronic spreadsheet. Still others like the envelope method. Whichever method works best for you, use it. A budget won't work for you if you're trying to conform to a method that doesn't suit your personality.
First Things First
The first step in writing a budget is to get all your paperwork together. You need to know how much you're bringing in (paychecks, child support/alimony payments, annuities, etc.) and what bills need to get paid each month. Write it all down. Think of bills that may not come every month but still need to be considered (taxes, water bill, etc.). Think about bills that are a little harder to define (food, gas, doctor bills and prescriptions).
Once it's all been written down, add it up. See the total amount that you bring in each month, and how much money is going out each month. For bills that don't get paid every month, take the total and divide it by how many months between payments (for example, a $600 tax bill that's paid every 6 months would have a $100 monthly expense).
How are your numbers? Is your income higher than your expenses? If it is, great! If it's not, check out the "Cutting Back" tab to get ideas on how to cut your bills.
Once you've determined where your money has to go, come up with a way to keep track of it so you can make sure all your bills are getting paid on time each month. As stated above, there are different methods. Use the one that works for you. Some may try each one until they decide which one works best.
- Paper Budget: Either on loose paper or in a notebook, write down all the expenses that are due each month. I find it helpful to have a sheet of paper for each month of the year. Write the name of the month on top, then list all the bills that are due for that month. Having a separate sheet of paper for each month makes it easy to keep track of those bills that are only due every 3 or 6 months. If possible, make a note of approximately how much the bill will be and when approximately each bill is due so you have an idea of when that bill will have to be paid. Write it all out in pencil so you can make changes as needed.
- Electronic Budget: As with the paper budget, you want to make a note of each bill that's due each month, but this time you'll be using a computer spreadsheet. Make a separate tab for each month so you can keep track of bills that are only due every 3 or 6 months. The beauty of an electronic system is the ease with which it can be changed. Come up with a layout that works best for you. For those with a smart phone or iPod touch, there are also several apps that will help you keep track of your budget as well. This keeps it at your fingertips for easy reference.
- Envelope Budget: If charts and spreadsheets don't work for you, try the easy-to-use envelope method. Take a standard white envelope for each bill or expense, and write the bill name, due date and amount due on the front. As the money comes in, put money in the appropriate envelopes. When the bill's due, take the money out and pay the bill. This works well for those without a checking account or those who prefer to have the tangible cash in hand rather than work with symbolic numbers. Put the envelopes in a shoebox or small bin, and keep them in order of due date to ensure all bills are being paid on time.
Once the bills have been paid, how much do you have left? This money should be divided up according to your needs and goals.
- Emergency Savings: Unexpected expenses come up – car repairs, home repairs, doctor's bills and more. Having money set aside to cover these expenses ensures that you don't panic or go without when these expenses occur. Ideally, money should be set aside each week or month. Keep it in a separate bank account or in a safe place at home where it will be accessible.
Emergency savings is also important in the event of an unforeseen circumstance that keeps you from being able to work – injury, layoffs or tragedy. This is why the more money you can save the better, with the goal being at least 3-6 months of living expenses (living expenses being all the bare-bones necessities your household needs to spend on each month – food, shelter, etc.).
- Retirement Savings: Unless you plan on working forever, saving for the future is also important. If your employer offers a 401k or 503b plan, look into having money taken out of each paycheck to be put toward retirement. If not, or if you would rather have more control, look into IRAs. Click the Retirement tab for more information on the different retirement accounts.
- Fun Money: All work and no play will definitely make you stressed, unhappy and disgruntled. That's why it's important to make sure you keep some money aside for entertainment. Treat yourself to the movies or a meal out, go to a museum, go shopping. As long as the necessities are paid for, having a little money aside for these "fun" expenses will keep you from feeling guilty. (If money is tight, there are many free and low-cost options available as well – click the Cutting Back tab.)
- Saving for Goals: In addition to emergency savings, it is helpful to save up for larger expenses that you know will be coming up. These can include a house, new car, education expenses and more. Saving for these as you have the money will keep you from getting into high levels of debt when it comes time to actually make that purchase or incur that expense.
- Investing: If the emergency savings account is well stocked, retirement funds are getting filled, and there's still lots of money left over, consider investing some of what's left. Whether it's in helping a small business get established or playing the stock market, investing can help your money grow. There is a level of risk involved, so choose carefully. Click the Investing tab for more information and ideas.
- Charitable Giving: Non-profit organizations are always looking for donations, and there is most likely an organization whose goal is in line with your priorities.
To make saving easier, some find it helpful to treat saving like a bill that has to get paid each week or month. Instead of paying a utility supplier, you're paying yourself. Or, have a portion of your paycheck deposited directly into a special savings account or automatically transferred into a savings account by your bank.
In many ways, savings is just as important as the bills. Having money saved can prevent disaster from occurring when unexpected or unplanned-for expenses come up.
Sticking to It
Once your budget has been created, it's important to stick with it. Keep track of your payments and where your money is going. If you find that you keep coming up short, look at your receipts and bank statements to find out what's going wrong. If you need to cut expenses, check out the Saving Money tab to get ideas on how to do that.
Making sure you stay on track will make sure your financial life stays healthy. Pay the bills, get money saved and plan for the future. Doing so will ease your stress and help keep financial crises away.