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Posted in Frugal Living

Budgets Can Help in Both Good and Bad Financial Times

Budgets Can Help in Both Good and Bad Financial Times

One of the most important aspects of successful personal finance is the establishment of – and then sticking closely with – a budget. While many people think that budgets are only used to track the income and outgo of a business, the truth is that planning one’s own household finances is equally, if not much more, important.

A good solid budget can help to keep you on track, ensuring that expenses don’t exceed income, while at the same time helping to allocate a certain amount of funds towards savings on a regular basis. It can also help you to see where you may have gone off course if things are not currently working out very well financially.

While most people do not live by a budget, creating one really is essential in determining where your income is going – and because of this, it can also be a factor in helping you to reduce or eliminate any unnecessary expenses that you may have.

Essential Elements to Include in a Solid Budget

When putting together your budget, it is essential to keep a close eye on both income and expenses. Income is typically easy to track, as many people keep close tabs on incoming funds via paycheck stubs and online banking statements. Where all of that income goes, however, can be a bit more difficult to follow, as there are numerous places that people spend money every month.

In most cases, income will consist of one or more of the following elements:

  • Wages
  • Commissions
  • Bonuses
  • Rental and/or investment income
  • Royalties
  • Social Security Income

Income can also include sources such as alimony, unemployment compensation, disability income, and funds that are received as an inheritance.

Expenses can also come in many different forms. In most cases, however, they can be categorized between mandatory and discretionary. Mandatory expenses are those bills that you are responsible for each month (or on a regular basis) such as your rent or mortgage, auto payment, utilities, and food.

In some cases, mandatory expenses will be a set amount every month. For example, the amount of monthly rent that is due will typically be the same amount from one month to the next. Because mandatory expenses are also usually paid on a regular basis, these costs are oftentimes easier to anticipate – which can allow you to more easily track them as well.

Conversely, discretionary expenses may not occur on a regular basis. Nor will they be a certain set amount whenever they come due. Discretionary expenses include those items that are not necessary, such as the cost of a vacation or entertainment. As these items are not typically necessary for survival, they can be more easily eliminated if need be.

How to Track Expenses for Your Budget

One of the best ways to get an accurate estimate of how much you spend each month is to track each and every purchase that you make – regardless of how small. At the end of the month, add up the total and then compare that amount with the amount of net income that you earn. (Net income is the amount that you actually have available to spend once taxes and other deductions have been taken out).

Some of the items in your list of expenses may include:

  • Rent / Mortgage
  • Auto Loan
  • Credit Card Payment
  • Student Loan
  • Utilities
  • Food
  • Gas
  • Water
  • Sewer
  • Trash Removal
  • Cell Phone
  • Cable TV
  • Internet
  • Insurance
  • Home Maintenance
  • Auto Maintenance
  • Clothing
  • Health Care / Medical Expenses
  • Household Items

Once you have a list of all expenses, add up the amount that you spend on everything in order to get a monthly total. If you find that the total amount of your net income is higher than your total monthly expenses, that is a good sign. If expenses exceed income, however, it may be necessary to cut out some of the non-essential items – at least for the time being.

The Bottom Line

The primary purpose of a budget is to provide a “blueprint” of sorts that will let you see just exactly how much money is coming in versus the amount that is going out for expenses. A good solid budget can also allow you to determine where your money can best be put to good use.

One of the biggest parts of the budgeting process is making a distinction between the two: Needs vs. Wants. While it may be hard at first, once you have established your budget and are adhering to it, you are likely to soon see a much brighter financial future going forward.