Basics of Budgeting

A budget is a tool that can both reveal problem spending areas and help fine-tune your cash flow.  The mere process of gathering information to begin or maintain a budget can help you control your spending and free up cash to save, invest, or pay off debt.  All budgets are not created equal, however; some are overly complicated, others require constant monitoring.  A budget that is simple enough to appeal to non-accountants and yet able to provide the benefits listed above is described under the heading: Basic Budget Guidelines (below).  

1. A monthly budget is often the most useful; since some expenses and income items are seasonal or irregular, figure their annual amounts and then divide by 12.  What we're shooting for is an estimated picture of your future cash flow.  Why estimated?  Because, you use past figures of income and expenses to estimate your monthly budget for the coming year.

2. Take your time, be thorough, list all of your income and expenses.  Don't waste your time, though; if a certain bill (or income item) is always the same, there's no need to tally it over an entire year.  

3.  Listed below are average percentages per general expense category.  They are meant as guidelines and suggested maximums.

4. As one of your regular expense items you should include payments into a savings (or investment) account (otherwise known as paying yourself first).  A good minimum savings goal is 10% of your gross income.  The importance of this step cannot be stressed enough; given enough time, it can literally bring you financial independence.  

 5. Some expense (and income) items are not easy to figure; overall food expenditures is usually one of these.  So as not to delay your initial budget indefinitely, on these items put down your best estimate; they can always be adjusted later.

When you have all income and expense items listed, crunch the numbers (do the math); subtracting expenses from income.  You should have a positive amount remaining; this is your bottom line and cushion for unforeseen expenses.  A negative bottom line is a sign that you need to work at reducing your expenses.  It is often possible to reduce your living expenses without reducing your standard of living.

Software Recommendation
To help you organize financially we highly suggest obtaining one of the more popular personal finance programs.  The two most popular titles are: Quicken by Intuit and Microsoft Money.  These programs contain functions such as: check books, credit card accounts, budgeting, financial planning, investment tracking, online banking, online bill paying, tax records, etc..  Each program can usually be bought for under $40 and can often be found on sale for even less.  Quicken is, by far, the most popular.