Creating a Budget
The key to a good budget is including as much information as possible so you can adequately prepare and plan. It's important to keep accurate records of your spending so you can see where you can save money and how much you can reasonably spend.
What is your current income?
The first step in creating a budget is to total your income every month. Include only your take-home pay (your salary minus taxes and deductions, and ideally, money automatically transferred into savings). Your income may also include tips, child support, investment income, etc.
What are your monthly expenses?
Next, track your expenses. For bills that vary from month to month, use a monthly average. For example, if your cellphone bill is $45 one month and $55 the next, estimate $50 per month. ($45 + $55 = $100/2 = $50) For annual bills, divide the yearly cost by 12 for a monthly figure.
How much of your income should be spent?
Rent or mortgage payments plus your credit obligations should not exceed 35 to 40% of your gross monthly income (income before taxes and deductions). The amount you owe on credit cards, monthly car payment(s), student loan(s), and other monthly payments should not exceed 10 to 15% of your take-home pay (the amount of your income after taxes and deductions are removed).
Put it in writing.
Document and categorize your expenses. Tally up everything you spend money on. Don’t forget your daily coffee or snacks — those can add up quickly! The best budget is one that's honest and all-inclusive.
Do the math.
The last step in creating your budget is to total your expenses and subtract them from your monthly income.
How'd You Do?
Did you have money left over at the end of the month?
If your income and expenses are EQUAL ...
- You might be living paycheck-to-paycheck. Review your expenses to see what can be cut and develop a savings plan in case of emergencies or unexpected expenses (An "emergency fund.")
- But only because you're using credit to pay bills, then making only minimum payments each month, you may need to talk to a banker or debt counseling service to help you get back on track to live within your means
If you have money LEFT OVER at the end of the month ...
You're doing a good job of managing your expenses! Here are some suggestions for the leftover money:
- Open a savings account
- If you already have a savings account, consider setting up automatic transfers to your savings account. Or if you have direct deposit, transfer a portion (or ask your employer to direct a portion) of your paycheck in your savings account automatically
- Investigate whether your employer offers a 401(k) or another employee-matching savings plan. The contribution you make to this type of account is taken out of your paycheck before taxes.
If your total was negative and you DON'T HAVE MONEY LEFT OVER ...
- You need to make adjustments immediately. Keep in mind that it's usually easier to cut back on expenses than increase your income. Analyze your budget to see where you can cut expenses — personal or entertainment expenses are often the easiest things to cut.
- Call your utility, cable, and cellphone providers, in addition to any lenders. Cutting your bills could take just a phone call.
- Consider increasing your income by getting a second part-time job, setting up a side gig, or by working overtime.
Take charge of your finances and your life by setting financial goals, planning a budget, and sticking to it.
The views, information, or opinions expressed in this article are solely those of the author and do not necessarily represent the views of Citizens State Bank and its affiliates, and Citizens State Bank is not responsible for and does not verify the accuracy of any information contained in this article or items hyperlinked within. This is for informational purposes and is no way intended to provide legal advice.
