Personal Finance/Budgeting

Budgeting involves maintaining control over your expenditures. There are typically three phases that show a maturation of a control of your budget. Defining - Defining your inflows and outflows to get an idea of your cash flow. Setting - Setting your budget to control how much your expenses are each month. Improving - Improving your cash flows by reducing your expenses and increasing your income. Making a budget Write out your total income Include wages, salaries, rent collections, settlements, allowances, or any other source of money you get. Write out your fixed costs These are the expenses that come in bill form like insurance, car payments, rent or mortgage payments, or payments to any other kind of loan. Costs like these need to be paid and don't change no matter how much or little you use them. It is important to get these down first, since these payments are generally out of your control. Write out your variable costs After you pay your bills, you can now allocate what's left of your income to other things that need to be paid. Groceries, utility bills, and other costs within your control go here. Sample Monthly income Primary employment: $1600 Fixed monthly expenses Rent / Mortgage: $300 Car payment: $336 Phone: $55 Kirby: $50 Insurance: $80 Variable monthly expenses Gas: $80 Cigarettes: $150 The basic budget Budgets don't have to be painful experiences. Now that you have a set of realistic goals for all of the money you will be getting and that you have an idea of how much money you will be spending, you can start to budget effectively. For the first month, just count the ins and outs. You can use a normal notepad for this. + Example (All amounts in US$) August 2005 income Income (job) 4,095 August 2005 expenses Rent 1000 Insurances 300 Food 200 Entertainment 100 Clothes/Diapers 100 Phone 98 Train 50 Credit Card 43 Gasoline 40 Gas 34 Electricity 20 Mysteriously Vanishing Money 165 Total Expenses 2,150 Leftover cash from July 820 Leftover cash from August 520 In August, they had 820 US$ in addition to 4,095 US$ from their income for a total of 4,915 US$. They spent 2,150 US$ and had 520 US$ left at the end of the month. They therefore saved 2,245 US$ in August. Counting the leftover cash in your wallet allows for a precise expenses count even if you forgot to actually count an item or two. The forgotten cash will show up as Mysteriously Vanishing Money (MVM). Savings were distributed according to the priorities set out in Chapter 1 and were as follows: House 700 Tuition 545 Retirement 500 Car 400 Travel 100 In case of unforeseeable emergencies when expenses exceed income, they use their travel money first, then the car money and then the retirement money to pull them out of the scrape. This is not recommended. In fact, an extra savings account for emergencies should ideally be created and hold about 6 months worth of income to deal with the ups and downs of life. Unfortunately, that is simply not possible for the family in the example above. They must therefore prioritize their needs and perhaps create a tighter budget. The revised budget Now that you've thought about how to cut your expenses, it's time to get to it! Some expenses of course are fixed and so cannot be easily cut. In the example below, rental fees are exorbitant but reducing them would entail moving elsewhere... Not a realistic solution. So, what can be cut? Food, ET and the phone bill look like prime targets. Another important one to hit is MVM as it usually represents items which you can do without... after all, you don't remember buying them! Utilities and gasoline are already quite low, so don't need to be taken care of. Gradual cuts may be better than taking out 50% of one item in one fell stroke and suffering through the entire month, only to face the uncontrollable urge to splurge on that item next month. Perhaps cuts of 10% a month would be easier to bear. August 2005 income Target budget Income (job) 4,095 4,095 August 2005 expenses Target budget Rent 1,000 1,000 Insurances 300 300 Food 200 180 Entertainment 100 90 Clothes/Diapers 100 85 Phone 98 88 Train 50 50 Credit card 43 43 Gasoline 40 40 Gas 34 34 Electricity 20 20 Mysteriously vanishing money 165 150 Total expenses 2,150 2,080 Leftover cash from July 820 Leftover cash from August 520 Hey, not bad! You have shaved 70$ from your budget. That's a great start. Continue doing this every month until you feel you are living *too* cheaply and yearn for a better life. Then, loosen up a little... just a little! Just enough to feel the difference between extreme poverty and the point where you enjoy life again. So, enjoy life, but on the cheap side!