A Step by Step Guide to Building Your Budget
Technology has allowed individuals to easily keep track of their finances down to the last penny, but you don’t have to track down every dollar to make a simple and helpful budget. Whether it is in a notebook, a spreadsheet or using an app like Mint all these tools work to achieve the same goal; to help people take control of their finances.
Some people find that they like to have a more hands on approach to their budget. Outlining a budget in an Excel spreadsheet is the preferred budget method beyond apps. We have included a simple excel template available for download, which includes automatic calculations to show whether or not you stayed on track.
To start, the best way to think of your budget is as if you were a business. You want to keep track of all the money coming in and all the money going out. The first step is to identify your sources of income on a monthly basis. Whether it is your salary, investment income, or other sources, categorize each on a pre-tax basis to avoid confusion. Next, apply the tax rate that you would expect to pay on your different sources of income to determine your post-tax monthly income.
Your post-tax income is all the money you have coming in and will be allocated to cover your expenses, investments, and savings. The easiest way to break out your expenses is to first list all your monthly, fixed expenses. These are costs that you know you are going to have such as rent/mortgage, car payments, health insurance, phone bill, etc. These are costs that generally do not change from month to month and are unavoidable.
The next section should list your variable expenses. These are the expenses that you exert some choice over, whether it is groceries, restaurants, or new clothes, you can set limits for yourself in the budget and try to meet your goals. Buying groceries is unavoidable, but you can try to buy things on sale or use coupons to meet your budgeted goal. Mapping out your variable expenses gives you a better idea of where your money is going and where you could save.
When both fixed expenses and variable expenses are subtracted from your post-tax income the money you are left with can be put towards your savings or your personal investments (depending on the type of account). Ideally, the remaining money should be equal to 20% of your post-tax income, however this is an extremely difficult goal to reach. A more reasonable minimum is 10%, with the ultimate goal of reaching the 20% mark. The provided template includes an automatic calculator to see how your budgeted and actual savings rate compares to your goal.
Whether you are living on a shoestring budget or just want to feel more in charge of your money, a simple budget gives you a top down view of where your money is coming from and where it is going. By spending just a little time filling out your budget each month, you will create exciting new goals for yourself and take the first step to becoming financially healthier.
For more on managing your income, click here.