As much as people don’t like the idea of making a budget, there are millions that would benefit from doing it. Because it’s a chore that most don’t like to do, millions of adults don’t know how to make a basic budget for their households. The lack of education is what brings millions of households to the brink of bankruptcy every year.
Those that choose to make a budget, no matter how distasteful it is, know they will need to dedicate some time to this task. They know that it may not be something they want to do but it’s important and they need to do it. What a good budget will show any adult is the income of that individual or family and where they spend money. A budget will allocate what money is to be spent where and when followed, specific goals will be met over time.
What to Gather
When making a budget, there are specific things that should be available immediately. These things are necessary to create an accurate picture of a home’s financial shape and build a budget.
Financial Statements: When people think of their budgets, they don’t always think of their financial statements. They only think of their bills and their paychecks. While they are important, so are financial statements. These statements can provide information about where money is being spent that traditional receipts aren’t kept. Financial statements can include bank statements, investment accounts and many other things. It tells a story of financial transactions that happen regularly in a household.
Receipts: This is very important. When people spend money, they are normally given a receipt. This shows what money was spent on and when. There could be patterns hidden within those receipts that most people aren’t aware of. When a person is looking at a pile of receipts, it’s easy to see where money has been going.
Bills: The bills that are paid every month, quarter or annually should be gathered so that an accurate list of expenses can be made.
Income Statements: Before making a budget, every source of income should be included. It can be from self-employment or traditional employment. It needs to be accounted for in the budget.
It’s important to have those things along with a piece of paper, calculator and a writing utensil for those that are happy doing a simple budget. For those that want to create an itemized budget, there are software programs available for that.
What to Do
Once all the materials have been gathered, it’s time to sit down and work.
Write Down all Income: The first thing that people should do is note how much money they have to spend. It’s easy to lose track of that because millions of people rely on credit cards to supplement their income. What money is being earned and brought into the home on a regular basis?
Make a List of What’s Owed: This is a list of things that should be paid every month. This list should include expenses for shelter, transportation, utility bills and essential things to live. This does NOT include entertainment bills and cable bills. This list is for things that are essential to living.
Make a List of Expenses: This list is where many people discover different habits. This list should include credit card bills, entertainment and other things that money is spent on. Make as many categories as necessary. Those that have at least a month’s worth of receipts will see where a lot of their money is being spent and why. Use those receipts to make a detailed expense list.
Do the Math: Once a complete list of income, bills and expenses have been made, the math can be done. Ideally there is money left at the end. Most people are surprised to find they spend more than they make. It is important that people understand what they are looking at and be HONEST. There is no right or wrong in these situations. It should be a startling reality of everyone’s finances.
Adjust: This is the period of time that people use to make decisions on what they spend money on. If there is too much money being spent in one area and not enough in others, now is the time to make the decision to adjust the spending. Some people find they are spending too much on their credit cards and digging a bigger financial hole. Some find they are spending too much money doing small things and it’s taking a huge toll on their finances. This is the time to make a conscious decision to stop doing certain things.
Once all adjustments have been made, it’s time to track. After the surprising look at what is being spent every month, most adults are able to make a decision to stop spending in certain areas to accomplish something. They are able to set limits for themselves and monitor their behavior so their income is more than their living expenses.
After the budget has been made, it’s important to monitor spending. It can take a few minutes daily or an hour or so weekly. It’s important to make a budget and monitor it or the results won’t be consistent or helpful.