The Basics of A Budget

As personal incomes remain somewhat stifled and the stock market still struggles to find direction, a lot of people have begun rediscovering a financial planning tool that started to make a disappearing act – the budget.  With many people living on tighter means, managing every dollar has become more and more important.

Budget

Creating an effective household budget doesn’t necessarily require a lot of work but it does require you having all of your ducks in a row from knowing all of your income sources and expenses to having up to date information on all of them.  Once you have all of that compiled (and that could take a little time if you’re a first time budget builder), you’re ready to begin.

Start by looking at all of your income sources.  For most, this will just be the salaries of those in the household.  If you have other reliable and predictable sources of income such as child support or alimony, you may choose to include those hear as well.  Retirees may want to include retirement income from pensions or investments if they’ll be using this to cover regular living expenses.

Once you have that tackled, you’re ready to detail all of your expenses.  This is probably where you’ll spend the most time since there are so many little monthly expenses that will need to be accounted for.  When breaking down expenses, it’ll be beneficial to you to separate your expenses into three different categories.

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The first is fixed expenses.  These will be those expenses that you can expect to stay the same month over month.  Examples of these types of expenses include payroll taxes, your mortgage, life insurance premiums, property taxes and day care expenses.

The second is committed expenses.  Like fixed expenses, you can expect to pay these each and every month but the actual amount of the expense may vary.  Here, you would find expenses like utilities, cable and gas for the car.

The third and final category is discretionary expenses.  These are the things that you choose to spend your leftover money on.  Gifts, household purchases, entertainment and activities for the kids fall into this category and will likely be the first spot you look if you want to make cuts to your budget.  This will be the most important category not to fudge the numbers on because those $4 lattes and $6 daily lunches will add up in a hurry if you don’t account for them.

The final category you’ll want to create is for savings.  Everything from 401(k) and IRA contributions, 529 College Savings Plan contributions and money going into an emergency fund all represent money that is committed every month and needs to be accounted for.  You’ll want to make sure you’re including all medical and dependent care flexible spending accounts here as well.

Many people assume that they have a good grasp on their financial situation until they start putting pen to paper.  When preparing your own personal budget, it’s most important to be truthful with yourself.  If you’re spending hundreds of dollars every month eating out, fess up to it.  Your budget won’t mean much if you’re using false numbers.  But if you’re looking for further incentive, it’s been shown that people who prepare and manage budgets tend to save more money over the long haul.  In that sense, building a budget can be one of the best deals around.

Photo credit: eric731

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Author Info

This post was written by David Dierking. David lives outside Milwaukee, Wisconsin and has been working in the financial services industry for over 13 years with a background in investments, accounting, and marketing. He earned his Chartered Financial Analyst designation from the CFA Institute in 2004 and was recently published in the Milwaukee Business Journal. You can also check him out at The Ultimate Fit Challenge

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