Why Should I Budget?
Not keeping track of what’s coming in and what’s going out each month can lead to stress and many sleepless nights (not to mention financial disaster). Creating a personal budget is easier than you think and can give you deep insight into where you’re at financially and where you could go. I recommend using a spreadsheet application (Google Docs is free) to create expense and income columns to get a running total of your expenses which you can update when necessary. I will guide you step-by-step on how to create a personal budget.
4 Step Budgeting Process
STEP 1: Create a List of Expenses
a. The bare necessities. When creating a personal budget, it is best to start by making a list of necessities that you have to pay each month. This includes: mortgage or rent, utilities (gas, electric, water/sewer), public transportation, medical expenses and groceries. Really, those are the only necessities. Figure out how much you’re paying over 12 months for each, and get a cost average per month.
b. Next on the personal expense ladder. This list includes things that give you security and peace of mind: health insurance (if your employer doesn’t cover), life insurance, auto insurance, and home or rent insurance. If you have paid for the internet access to read this post, you should have these things.
c. If you must. This list will include things that most people want, but don’t need. If you’re expenses exceed your income, this is the place to cut back: internet access, cable or satellite television, phone, and auto lease or loan.
Step 2: Create a List of Sources of Income
The important thing here is to make sure that you list only take-home income (versus pre-tax salary). Don’t include things like tax returns or bonuses, if you don’t have to. For those who are self employed, consider averaging what you make over the year and starting out with extra savings for those lean months.
Step 3: Evaluate your Net Income or Loss
Take your income and subtract your expenses. If you have a positive number, you are doing better than many. Take your extra money and put it into a Roth IRA. If you max out a Roth IRA, invest the rest in mutual funds in a personal investment account. If you’re in the red, we have some work to do.
Step 4: Prioritize and Re-balance
The great thing about a personal budget is that it opens your eyes to where you can cut back in some areas to free up more cash. For instance, get 3 quotes on each of your insurances once per year to evaluate if you could be saving by switching. If you are in the red, consider where you can cut back. Do you really need a car when you could bike to work? Do you need 300 cable channels? Do you need 2,000 cell phone minutes per month?
To this end, I have created a free budgeting spreadsheet for you to use and track your budget!
Where have you been able to cut back to free up cash?