It is a common predicament everyone faces: where did all the money go?! Why is it so difficult to make ends meet at the end of the month? An indispensable tool in finding the answers to these questions is a monthly budget. Everyone can make a budget, and if you follow the steps set forth below, your financial situation is sure to improve.
1. TRACK YOUR EXPENSES
Most of us do not keep a careful account of our daily expenditures. You may list the checks you write in your checkbook, and keep an eye on your online bank statement for purchases with a debit card, but those expenses are only part of the story. Consider how many times you buy a coffee or a soda with cash. Perhaps you drop a few coins in a parking meter, or use cash in a parking garage. There are many instances over the span of a week or month when you may purchase small items, and they do not appear on your statement or make it into your checkbook. All these purchases add up, and you generally are unaware of their cumulative effect on your finances.
The first step in setting a budget is making sure you know where every penny is going. It may seem minimal, but the dollar we spend on a small item is part of the answer to our questions about cash flow. Keep a record of every expense, noting how much was spent and for what purpose. This effort may seem a bit daunting, but without a careful record over the span of a month, any budget will be useless. Make it a habit to write down your purchases at the end of the day, before you forget. And be honest! It does you no good to leave off that muffin purchase because it’s embarrassing!
2. CREATE USEFUL CATEGORIES FOR YOUR EXPENSES
Some expenses are easy to categorize, such as rent or mortgage payments. Other choices are not so clear. Should you have a category for “utilities”, or separate ones for electricity, gas, water, trash pickup? Should you lump all your communication services together, or break out cellphones, landlines, and Internet providers?
Some of these decisions are a matter of personal choice, but a good rule of thumb is the “Goldilocks Rule.” You don’t want categories that are too big or too small, but just right. The decision on what categories to include in the tracking of your expenses will depend on your particular lifestyle, but remember that the purpose is to know where the money is going. If you dine out a lot, then there should be a line item for “eating out,” but you may want to break it down into “fast food” and “restaurants” if you entertain clients in nice restaurants frequently. Some people can get by with a general “Personal Care” section, but if you spend a lot of money on your hair, nails, and other grooming expenses, it might be useful to give them a separate section. Just remember, the point to be of use to you, so make your categories informative, but manageable.
3. KNOW YOUR SOURCES OF INCOME
This step may not be as difficult as getting a handle on expenses, but for some people there may be challenges in this area too. If you are in an industry, such as restaurant work, you may get a fair portion of your income from tips. Cash in the pocket can easily flow right back out when buying lunch or cab fare. Knowing exactly how much you brought in is just as important as knowing what is going out. An additional bonus to keeping a record of your income is that you might see that certain expenses, such as snacks of drinks, tend to be made when you get irregular income of some type.
4. CALCULATE YOUR BOTTOM LINE
Once you list your income and subtract your expenses, with a good idea of what those expenses represent, you will hopefully have a surplus at the end of the month. If, however, you seem to not have enough money at the end of the month, the detailed expense listings will provide a clear idea of where money is being wasted or areas where you are spending more than necessary.
5. ADJUST YOUR SPENDING
If you are lucky enough to have a surplus at the end of the month, you are on the way to a better financial future. You may be able to save some of that surplus for anticipated needs. If you do not have a surplus, or if it is distressingly small, look at your expenditures and find areas where you can cut back. The chances are good that you will see some areas where you spend more than you need. Adjusting habits in those areas can put you back in balance.
Keeping a budget may not be fun, but it opens up opportunities for you to live a less stressful and more productive life. Give it a try, and see how well it can work for you.
Photo courtesy of s_falkow via Flickr