How to Budget Your Money

Sunday, March 15, 2009

Before you can do any financial planning, it is important to examine your income and your expenses. When you spend more than you earn, you are heading for financial disaster. Calculate every cent you spend daily, no matter how small it is.

Calculate your regular income. Count income from wages, tips, interest on savings, child support payments, and any other source of income. Include that of your spouse also. Also consider more variable sources of income. Do you receive regular overtime or a large bonus? Is it guaranteed? Can you calculate average amounts by using past bank statements or pay slips? Try to be accurate and get to an average 'net' (after taxes) income.

Identify your expenses. First identify your large, predictable expenses. For most people these will be housing, taxes, insurance premiums, and utilities. Then for at least one month, record every daily expense no matter how small the amount. Save all receipts and expenses for one month. Ideally, you need to carry around a pen and small pad with you for one full month. Write down every amount you spend, what it is for and where you spend it. Many people underestimate these small but frequent expenses if they don't keep careful records. Also try to estimate a budget for large, infrequent expenses. These are things like house repairs, insurance deductables, and purchases like cars and computers. Convert these from estimates like $12000 every 10 years, to $1200 per year or $100 per month so you can compare them with the other expenses and income. Compare income to expenses. Money coming in (income) and money going out (expenses). If your expenses are more than income, you need to take action! Which of the expenses identified above will be easiest to reduce?Pay off debt and build savings. It is important that you commit to eliminating your debt as it will be difficult at first, but will get easier.

Don't rush budgeting. You need to figure out exactly where your money is being spent the most.If you find your expenses are extremely high, compared to your income, you have to cut back on some unnecessary spending. Very few people ever bother to budget, which is why so many people are in debt. Few really realize just how much they spend on worthless expenses. Try to categorize your fixed expenses (e.g., those expenses that don't change from month to month, like a mortgage or car payment) and your variable expenses (e.g., those expenses that can go up or down, like your utilities or mobile phone bill that depend on your usage). Since hidden or unmanaged variable expenses can eat away at your income, those might be good candidates for categories to monitor.

You can also use the Internet to help you budget your money. offers free budgeting web services that enable you to track all of your spending by downloading all of the transactions for you and categorizing your spend. To compute after tax income, try to estimate your actual tax liability from previous tax returns. Do not rely on your employer's withholding as an accurate estimate of actual taxes owed. Live beneath your means - do not overspend. Be careful about how much you spend on your everyday expenses. You may want to write down everything you spend in a month. Keep all your receipts for the month and then calculate to see how much you are really spending when you run out to the store to pick up some quick items.


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