How do you go about making a budget? Where do you start (ie: with income or expenses)?
Starting a budget can be very overwhelming. The first step is to find the format that works best for you! Formats vary and include biweekly, weekly, monthly, or annually. I usually suggest either bi-weekly or monthly, because creating an annual budget can get a little overwhelming. There are many different ways you can do a budget, but the formula is the same for all:
Income – Expenses = Bottom Line
Start with your income. This income will include any income that is definite. Any side jobs or money given to you that is not regular should not be added in these calculations, and should just be considered extra money that goes into your savings account. If your paycheck changes constantly, try taking the average of your last 6 months to accurately calculate your income. Remember it is always better to calculate this on the lower side if you are not sure. Again, any extra money can be put into your savings.
Once you have your income calculated, move on to your expenses. Typically there are two separate areas for this. The first section is for the day-to-day living expenses. This includes anything from your rent and utilities to your food. The second area is the one people tend to get stuck on because they forget to add in purchases that do not happen all the time. These are items such as gifts, school tuition, books, clothes, and medical expenses. Though you do not need these items every month, it is helpful to put away a little bit each month for these expenses so that when they do come around you have the money already saved and in an account to use. Try to also include a spot in your budget for pocket money. This is the money you will keep on you to pay for things like beverages, snacks, and those items that were forgotten in your normal grocery shopping trips.
The last section is your monthly debts. These are your mortgages, loans, and credit cards. Having these in a separate section helps to allow you to see those debts more clearly and separate them out to help understand where you are. These are the debts you should continually work on to pay off each month. If you have a positive bottom line, try adding a little more to your monthly payments!
Once you have clearly identified your income and expenses you finally have your bottom line. Contrary to popular belief, this number should be zero. The only time you should have excess in the budget is if your paycheck was more than originally calculated, or if you were given money. In this case put the extras in your savings or pay down some of your debt. Keeping this number as close to zero as possible will allow you to be able to use your money as efficiently as possible!
Here’s a tip! Use budgetsketch.com to map out your bills! Though the paper budget is excellent as well, this site allows you to work with your budget and change it constantly to match your paychecks. It works on a week-by-week basis, rather than a monthly basis, and is completely free!
I suppose it depends somewhat on the reason you are wanting to budget your finances.
However, I think a really good way to start is by simply keeping a detailed record of your income and expenses for 3-6 months. Break the data down into categories to get an idea of your typical expenditures sans budget, then use that as a basis for whatever budgeting goals you might have. For example, cut 10% from entertainment expenses and re-direct that to savings for a down payment on a house.
Start by knowing, or working up a reasonable estimate, of how much income you have. Reason: many families during this recession are in situations where they can do little about the income. Then make your expenses fit that number.