Building A Budget

What is a budget and how do you build one?

A personal or household budget is an itemized recap of forecasted income and expenses for a defined period of time, most frequently tracked by month. While the word budget may cause your skin to crawl, it gives you the freedom to allocate dollars before you spend them. In this way, a budget is a useful tool to help achieve your financial goals.

Why build a budget?

If you are one of the many people for whom the word “budget” is the same as the word “denial,” you may be surprised to learn the opposite is true. A well-designed budget is the best way for you to reach goals and achieve financial independence without having to sacrifice all of life’s pleasures. An effective budget will help you:

• Achieve Goals: Keep your finances in line with the dreams you set for yourself.
• Use Money Efficiently: Ensure you don’t spend money where you don’t need to.
• Become Financially Secure: Life is filled with surprises. Being financially fit will benefit you when unforeseen circumstances arise.
• Identify Detrimental Habits: Expenses should be less than income. Having a budget will help you see when expenses are greater than your income, and where it’s going. This can help you correct some detrimental financial behaviors.

How To build a budget

Step 1: Determine Your Income

Whether you’re married, sharing a home, or single, you need to know how much money you have coming in before you can decide where your money should go.

Step 2: Review Your Expenses and Track Where It Goes

We spend what we make. Set yourself up for success with automatic, monthly payments to pay your bills yourself. Remember that “you” are an essential expense and strive to put at least 10 percent of every pay check towards savings that can be used for big-picture goals such as a home purchase, college tuition, and retirement.

• Write it all down
• Keep receipts
• Use debit or credit card
• Monitor ATM use
• Use expense tracking software

Once you’ve calculated your total monthly income, you can start to separate it into spending categories, such as:

• Emergency Fund: This fund should cover your expenses for 3-6 months to protect you from an unexpected event such as losing your job or facing a situation in which you are unable to care for yourself and your family. Tip: Keep this account liquid by putting it in a savings account, CD, or Money Market.
• Housing: This includes rent or mortgage, household maintenance and repairs, Homeowner’s Association (HOA) fees, renters and homeowners insurance, and property taxes.
• Savings: Remember to pay yourself. Experts recommend that at least 10 percent of your earnings should go towards savings for long-term goals, like retirement or a college fund.
• Utilities: Household budget category for utilities should include gas, electricity, water, and sewage, land line and cell phone payments, cable television and Internet access.
• Health Care: Be sure to allocate funds such as premiums for health, disability, vision and dental insurance. Prescription drugs, eyeglasses and contacts, and other health aids go in this category, too. Long-term care insurance to this budget category would be included.
• Consumer Debt: Credit card bills, student loans, installment agreements and car payments.
• Food and Groceries: Whether it’s shopping for groceries, grabbing a coffee or dining out with family and friends this amount will depend on family size and eating habits.
• Personal Expenses: Salons, hair care, clothing, gifts for others, clothes, and dry cleaning make up a few of the countless items that could go into this category.
• Entertainment: After you have met all of your “needs” you probably still want to have some fun with whatever funds are left over. Many individuals spend 5 to 10 percent of their income on entertainment which could include going out to a movie, putting aside money for a dream vacation or treating your family to a day skiing in the mountains.

Step 3: Construct the Budget

There are multiple ways that you can build your budget. Some people like electronic or online based tools, while other prefer to do everything on paper. Here are some popular options:

• Paper Budget Form: Grab a pen and paper and get started.
• Online Tools: Online budget forms and other money saving apps can help you track spending activity on a daily, weekly, and monthly basis.
• Spreadsheet: Google Docs and Microsoft Excel provide an easy input format that can even be shared with other family members to keep them accountable for their spending habits.
• Calculators: You can find free budget planner calculators, like the one below on this page.

Step 4: Review and Repeat

A budget is not a one-time, set-it-and-forget-it project. Each month you’ll need to see how your actual income and spending matched up to what you predicted. The good news is that once you have an initial budget built, it’s easier to adjust moving forward. The more you do it, the easier it gets.

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