By Jessica Malitoris on August 3, 2010
.jpg.aspx?width=75&height=75) Budgeting is essentially the practice of keeping track of expenses to limit costs. Stated even more simply, it is a spending plan. A budget takes into account what things you spend over the course of a period of time, how much you earn in that time, and how those two things relate.
When budgeting for normal expenditures—bills, mortgages, and other essential payments, it is typically better to budget over a shorter period of time. A month can be a good time range, particularly if you are attempting to get out of debt, and need to focus on making monthly payments.1 Typically, it’s easier to budget around your income, so if you are paid every two weeks, plan your expenditures for two week time periods. Also, set aside a certain percentage of your income—even if it is only 5-10%—to save every time you get a paycheck.2 If you’re saving for a specific goal, you can apply the same savings strategy, however if you find you earn more than the percentage you have determined you will set aside, it is better to save as much as possible.3 If you find yourself saving more than usual, put some into a retirement account, but leave aside the rest in an “emergencies only” account, to help protect you in case of unexpected, large payments.
To begin setting your budget, collect receipts or records from bills to build a sense of how much you spend over the course of the period of time you have decided on. For set amounts—for loans, mortgages, and insurance premiums—make sure you have a clear sense of how much you are paying. Then create a list of all the more flexible expenses: food, transportation, gifts, and some less essential purchases. Finally, list all of the payments you make over longer periods of time, and divide those payments into the smaller time blocks you are building your budget around. You now have a rough sense of how much money you spend per month, and can plan around it.4
Sources:
1Muckian, Michael. Complete Idiot's Guide to Finance and Accounting. New York, NY: Alpha Books, 1998.
2Armstrong, Alexandra and Karen Preysnar. "Advice for Recent College Graduates". Better Investing. 01 Sep 2008: 12.
3"FINANCIAL PLANNING: MAKE YOUR MONEY WORK FOR YOU". Minnesota Monthly. 01 Oct 2005: 216.
4O'Neill, Barbara. "Twelve key components of financial wellness". Journal of Family and Consumer Sciences 4(2002):53.
|