The Basics of Budgeting

There’s a Zen to budgeting. Budgets are all about balance, finding the right combination of spending and saving to keep your financial house in order, enabling you to do the things you want to do, and save for the future. Keeping a budget may sound boring—OK, we know it is boring—but it’s a vital part of a successful financial life. The good news is, putting together a personal budget can be simpler than many people think. Let’s take a look at budgeting and how to get started.

A budget is both a plan and a record, allowing you to track your spending and saving while simultaneously planning the best ways to do both. As such, the first step is to gather the information you’ll need. Ideally, you’ll have all of the following, but just do the best you can:

  • Bank statements
  • Investment accounts
  • Recent utility bills
  • Tax records for the last several years
  • W2s, pay stubs, or 1099s
  • Credit card bills
  • Receipts from the last three months
  • Mortgage or auto loan statements

It sounds like a lot, but this is the information you’ll need to really get a handle on your financial situation and how best to set up a budget.

The next step is to calculate your income. The best way to do this depends on your work situation; if you have a regular paycheck from either a job or social security you can just use the net income from your pay stub. If you have a variable income, you’ll need to figure out how much you’re earning on average; the best bet is to use your lowest earning month of the last year as your baseline. Figuring out your real income is important; you’ll need to know how much is coming in before you can plan what to do with it!

Now we’ll need to move on to calculating your expenses. You’ll need to be thorough here as well; surprise or forgotten expenses have ruined many a budget! While everyone has their own needs, a common list of expenses might include the following:

  • Mortgage payments or rent
  • Car payments
  • Insurance
  • Groceries
  • Utilities
  • Entertainment
  • Personal care
  • Eating out
  • Childcare
  • Transportation costs
  • Credit Card Payments
  • Travel
  • Student loans or tuition
  • Savings or regular investments

Again, it’s a lot of information but you’ll need it all so you can add together accurate monthly total expenses. As you might have noticed, some expenses are variable: groceries, entertainment, and gas are good examples. Try to err on the side of a high estimate for these.

Once you have your income and your expenses totaled up, you’ll want to compare the two numbers and see how much of your income is being consumed by your expenses. Ideally, you’ll be well into the black, with expense below your income. If not, or if you’d like a little more wiggle room for savings, you’ll need to adjust either your income or your expense, or both. This may involve cutting costs on variable expenses or reducing/eliminating fixed expenses, finding other sources of income, or maybe some serious lifestyle changes. If your income exceeds your expenses, you may find the “50-30-20” budgeting tool useful. This is the idea that 50% of your budget should go to necessary expenses, 30% should go to “wants”–expenses like entertainment that aren’t strictly necessary, and that 20% should go towards debt repayment if necessary. While we’re on the subject, saving money is a necessary expense; we all have to plan for the future. If your income/expense ratio permits, you’ll want to start putting some money aside.

Sticking with your budget is a matter of personal discipline, and unfortunately, we can’t teach that here. However, we can offer some tools to make it easier. Budgeting apps are popular these days, and they offer a secure way to track your spending and expenses while keeping your long-term goals in mind. Picking the right one for you comes down to your needs and personal tastes, but there is a wide variety available. Spreadsheets in Excel are boring but useful tools and there are a host of tutorials to teach you how to set them up. The important thing is to accurately track your spending and income while planning ahead and sticking with the plan as things develop.

A budget is an important tool in building your financial future, but you may want some expert guidance for more detailed and complex financial planning. OmniStar Financial Group is here to help, whether you’re looking forward to retirement or building a business. It’s a complex and evolving financial world right now, and professional help can make things so much easier. Get in touch today.