Organizing Your Life--Creating a Budget

Having a budget eliminates the "where did our money go???" dilemma. But, creating a budget can be overwhelming. Here are a few easy steps to get you started.

I. Understand Expenses

•  Before you can create an effective budget, you need to understand the difference between fixed, necessary, and discretionary expenses. I have a basic rundown here.

II. Make a List

• Fold a piece of paper into three equal parts. On the left, write "Income," in the middle, write "Fixed and Mandatory Expenses", and on the right, write "Discretionary Expenses". 
• Under the "Income" header, list ALL the income you receive. This includes Salary, Investment Income, Pensions, Social Security, Financial Aid, and Bank Interest.
• If you are doing your budget one month at a time, you can convert a weekly paycheck into a monthly amount, by multiplying the amount of the paycheck by the number of paydays in the month. If you are doing a budget for several months out, you can multiply the amount on a single paycheck by 4.2 (average weeks in a month). But, keep in mind this latter method will cause your actual numbers to vary a little, since this gives you an average and not an actual amount. 
• Under the "Fixed and Necessary Expenses" header, write down all your Fixed and Necessary Expenses, starting with the fixed expenses (tax if you are taking into account a pre-tax paycheck amount), tithe, loans, mortgage/rent, insurance, utilities, etc. Once you have written down all your Fixed obligations, begin to write down all the Necessary Expenses--things necessary for living, but the amount can be changed on a month-by-month basis, such as gasoline, groceries, medical co-pays/doctor's appointments, personal care, etc. If you don't know how much you're going to spend in these categories, it's better to guess a higher amount than a lower amount, so you have more wiggle room in case you go over. 
• Finally, under Discretionary Expenses, put all the categories you spend money on in a given month, but that are not necessary for living. This includes dining out, entertainment, kid's toys and games, vacation, etc.
• I make putting money into Savings a fixed expense. It's easier to take money out first, than try to come up with it later. The same goes for any "Savings Goals." For example, at the beginning of the year, I decide on a budget for Christmas that year, divide it by 12, and put away that amount every month. 

III.  Do the Math

• Your income needs to be greater than or equal to your expenses in order for your budget to work. If your income is less than your expenses, you will need to figure out where you can make adjustments or sacrifices. 
• Subtract your Income from your Fixed and Necessary Expenses, this is how much you will have leftover for your Discretionary Expenses. 
• Be realistic. You may "budget" $200 in groceries for your family, but if you're constantly spending $400/month, the budget does absolutely no good. If you don't abide by your budget, you're just wasting your time. (I budget $25/person per week for groceries.)
• Keep track of your spending to know exactly where your money is going. We'll talk more about this next time.

Next time we'll discuss keeping track of spending, and basic percentages of where your money should go every month.