For this exercise you will need a calculator, a pen, a ruler and a sheet of ruled A4 Paper. You can use a plan sheet of paper as well, but the lines make it easier.
Alternately you can duplicate the template digitally with a table in Microsoft Word.
Joe was feeling bad about dropping my package, and so he agreed to let me share his budget so you all can refer to it as I go on in my explanation. Thanks Joe!
|Clumsy Joe's Budget|
Step 1: Determine what categories you need by thinking of what you spend money on in a month, and grouping them under the headings I provided. Joe may have some categories here that you don't want or have left out some.
Joe is still living at home, so he doesn't pay rent. He like most young men, bought a car as soon as he had his first real job and so has a car loan. He seems to be responsible because he is paying some of the household bills.Way to go Joe!
Step 2: Draw the table as shown above, modifying it for your categories. You may have to add in more lines, or remove some.
Step 3: Now you calculate how much money you will budget with. If you are a salaried worker, you are going to use the amount of money you are paid after taxes and other deductions. If you have a variable income I recommend using an average in your calculation.
Long term savings are deducted from this net income figure; this includes any life insurance, investments or retirement.
In Joe's budget, he is savings 100 dollars for Retirement and 100 in a mutual fund. He deducts that from his net salary and is left with 1800 as his monthly budget amount.
You may not be able to save for long term needs right now, so you will use your entire net income figure.
Step 4: Using past bills or your best guess fill in the budget column, using pencil at first as you may need to change some of the amounts. Each section's total is tallied at the top of the category box, and the entire total is noted at the bottom.
The total in the budget column should equal the amount you have to available income. If not, go back through and adjust where you can.
Step 5: Once you are happy with your totals, you are now ready to use your budget. To use the budget you need to keep track of the money that you spend and write it in at the end of the month inside the Actual column.
Step 6: You then calculate the difference between the two and make a note of it in the Difference column.
Step 7: At that point you will have a financial record of what happened in your month. If you estimated correctly, your Actual column will be the same or less than your Budget column.
It is normal if you find yourself to be over in a particular category or to have overshot the budget all together. Honestly evaluate what happened to determine:
a) If you under-budgeted a category or were too generous in others
b) If you had an unexpected emergency that completely derailed your budget
c)You went crazy with your spending.
d) You are in a situation were you cannot sustain your current lifestyle.
Step 8: Decide what you will do with this information; make a plan and a new budget.
It makes no sense to continually roll over the same budget if it isn't serving you.
If you need to adjust your spending habits or downgrade one part of your life style, so you can live richly in another, let this be reflected in your budget.
Also if your priorities change, you budget should also change.
Remember to be flexible and expect challenges or mistakes. Budgeting is a habit and it takes time to build it. The rewards of it though are endless.
If you have any questions feel free to comment below. Additionally if would like help with your personal finances, contact me. I am available for consultations at a reasonable rate or on a skill exchange/barter basis.