It is necessary to learn the skill of balancing income and expenses no matter what your financial situation. Many people put off keeping a budget until they are financially “on their feet”. However, in order to get financially “on your feet” a budget is a necessity. And to be sure, what we call a budget is nothing more than the activity of balancing income and expenses.
Balancing income and expenses first of all requires that you know both. Many people make a budget that does them no good because they do not have an accurate view of their expenses. They will allocate some amount to “general expenses” without knowing exactly where that money is going. This is not the correct approach. You need to know what you spend and where. The way to do this is take one month and track everything you spend. Write it down and track it. Then at the end of the month break everything down into categories such as entertainment, food, magazines, books, whatever. Tally those totals and then use that month for establishing your baseline budget.
After your tracking month you will be able to see if you have a problem or not. You do have a problem if your expenses are greater than your income. You have no choice but to cut back somewhere. Separate out the categories that are necessary such as housing and bills and see how much you have left. This amount is what you have available for savings and entertainment. Next you should take 10 – 25% of that amount and establish it toward savings. This will ensure that you have money saved each and every month for emergencies or unforeseen expenses. The remaining amount is the total you have available for discretionary spending.
Next evaluate your income. Is there anything that can be done to increase this category? Whatever your situation there is only two ways to change your finances. One way is to decrease expenses and the other way is to increase income. These are the only two ways to adjust your budget. There are no other ways. So evaluate income and see if that can be increased. Follow the previous lesson and determine what else you might do to provide value that is a wealth building activity.
Another category that must be accounted for is future expenses. This takes the form of vacations or college expenses or something of that nature. These expenses must be budgeted ahead of time and saved for if necessary. Do not forget these items because if you do they can certainly throw your budget out of wack. Think of any expenses that will be occurring in the next year and create a category for that. Then create a category for future expenses that will be occurring between one and five years.
If you follow these steps then you should have a sound budget established with all your income and expenses categorized. Financial planning is your relationship to your money and like all relationships it is subject to change. Therefore don’t expect the budget you make today to be the budget you need tomorrow. You need to revisit the budget as your situation changes. A good rule of thumb is to go back to it every 6 months and see what needs adjusting. If you can do this you will be that much closer to long-term financial success.