Gov PF: Creating a Budget


Create-a-Budget

To manage your money well, you need to know some basic information, use some common sense, and then take action. First, set up a budget. Make a list of your income and expenses. Setting up and sticking to a family budget is the first step toward financial success.

To do this, you make a list of your income and expenses. Under income, list all the money you anticipate earning for the year. For most people, most income will be what they earn from their jobs. If your income varies month to month, divide your annual income by 12 and use the answer for the monthly income in your budget.

Then list your expenses. To help make sure your list of expenses is complete, look at last year’s bills, credit card statements, and bank records. To capture the amount you spend on items you buy with cash, keep track of your out-of-pocket spending for a month or two. After you’ve done all this, you will have a good idea of where your money goes each month. Common expenses are rent, car payments, insurance, groceries, and so forth. Don’t forget to list your savings amounts for each of your goals. If you wait to save what’s left at the end of the month, you will never begin saving.

Families ordinarily have what we call fixed expenses and variable expenses. Fixed expenses are ones that are relatively constant each month. These are a family’s definite obligations such as a house payment, rent payment, car payment, and medical insurance. These expenses are hard to change in the short term, so we say they are “fixed.” Variable expenses are ones that are likely to change in the short term. Examples include telephone bills, groceries, medical bills not covered by insurance, entertainment, recreation, charge account purchases, and so forth. These are expenses over which you have more short-term control. Occasional expenses or periodic expenses are those that occur once or a few times a year. Personal property taxes, income taxes, car insurance, birthday gifts and holiday gifts are examples of expenses that get some people in trouble because they forget to plan for them.

Now, subtract your expenses from your income. If it is a positive number, you have more income than expenses, you have surplus cash that can be put to other uses. If, however, the number is negative, then you will need to cut your expenses, increase your income, or use some of your savings to get through the month. If you have any surplus cash, plan how you will use it. People who set aside a portion of their income in savings do so for a variety of reasons. Among most frequently cited reasons are the following: for a rainy day, for purchase of costly things, for additional income, and for retirement.

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