For several months we have been experiencing inflation in America. Most things, especially necessities, cost much more than they did a year ago. Your income may be higher; your expenses certainly are! That means it is time to take a look at your budget.
In January we have to deal with the consequences of our Christmas spending. We may have travelled. We may have used our credit cards much more than other times of the year. We may have taken out short-term loans. Now it’s payback time!
A budget will show you how much money you expect to bring in, then compare that to your required expenses, such as loan payments, housing costs, and insurance, and your discretionary spending, such as entertainment or eating out.
First calculate your income. Use the net income, or take-home pay, from your paychecks. If this varies, use the average. Add income from other sources like Social Security or child support payments.
Nest the hard part: create a list of your monthly expenses. Some expenses are fixed, which means you make the same payment every month, like rent. Some are variable, like groceries. Use your bank statements, receipts, and credit card statements from the last three months to identify all your spending.
Now you can create a structured budget so your spending is controlled. Figure 30% of your income for housing, which would include your mortgage or rent payment, property taxes, homeowner’s or renter’s insurance. With the way rent went up last year, you may have to allocate 35% and decrease what you have to spend on other things. Next allocate 30% for other required expenses like utilities, groceries, car payments, car insurance, medical insurance, day care expenses, etc. 20% should be spent on reaching financial goals. This might include debt payoff (loans and credit cards), building a retirement account, saving or investing, or charitable donations. Finally, 15-20% should be for wants, which might include television channels, clothing, entertainment, eating out, gifts or toys.
There are several ways experts say to build your budget, so if this one doesn’t work for your financial situation, get online and do a little research. There are also forms you can print and fill in. Some financial experts recommend putting the money for wants as cash into an envelope, and when it’s gone, you can’t spend any more.
If your expenses are higher than your income, you have to cut back. Never spend for a want before something you must have or a bill that must be paid. Decide whether you can trim some things like TV streaming or phone plans. Before you make a major purchase, plug the payments into your budget and make sure you can afford them. Some expenses only occur a few times a year, so be sure to save for them. Budgets can be destroyed by phantom spending: getting cash from the ATM, buying a cup of coffee or a drink every day, lottery tickets, impulse buys, fees for late payments or insufficient funds.
Every household should create an account that you won’t touch unless there is an emergency. This fund could be used if your car breaks down, or an appliance breaks, or someone gets sick, or you need to travel for a family emergency. This should have about $2,000 in it, and you need to replenish this as soon as you can if you’ve taken money from it. It may take a while to build to that amount, but it is worth it to know you don’t have to get a high interest or payday loan when something bad happens.
Discuss your finances as a family. Arguments over spending or saving money is the number one cause of relationship stress and divorce. The problem isn’t over how much a household earns; it’s how they spend. Not talking openly about how you are going to spend and save, even with older children, can be a mistake. Sticking to a budget helps to create positive relationships, avoid stress, and build financial strength.