Having a budget is one of the most important things if you want to take charge of your finances. The problem is every personal finance guru seems to seems to have a different philosophy on the subject. For someone who doesn’t know where to start the information can be overwhelming. What is the right way to make a budget?
I think there are two simple approaches that will help you to put together a budget that fits your needs. These are what I call the expense-first method and the idealistic method.
If you have been on your own for a while then the expense-first approach may work best for you.
To build a budget this way you need to gather all of your expenses for the last three months. Take all of your expenses and group them into the following categories:
- Household Items – This includes rent/mortgage and utilities
- Car Items – Car payment, insurance, maintenance and gas
- Food Items – Dining out and groceries
- All other items
Depending on your situation you may also include categories for pets or kids. If you are single and are not sure how to assign an expense you can look at a sample monthly budget for a single person for ideas.
Once you have all of your expenses categorized then compare the total to your income. If your expenses are less then your income then add a line item for savings or debt reduction. If your expenses exceed your income then look at your spending and see where you can cut back.
The other option is to set up a budget using using percentages. I call this the idealistic method since most financial advisers agree that there are certain items that should take a certain part of your income. That may sound slightly cryptic so let me provide an example.
- Saving – 10%
- Housing – 35%
- Automobile – 18%
- Food – 10%
- Healthcare – 15%
- All other bills – 12%
Now you can take your after tax income and multiply it by those percentages. That will give you a spending target in each category.
I really like this approach since it hits on the main reason to have a budget. A budget allows for every dollar to be allocated before you receive it. That means that you don’t have to worry if you will have enough money to pay all of your bills or put food on the table. It also means that you don’t have to feel guilty if you want to go out to eat or buy a new pair of shoes.
The method you use to make a budget isn’t that important. The important thing is the end result – having a budget that works for you.
Now, put your budget somewhere where you will see it every day. Put it on your fridge or your bathroom mirror. A budget doesn’t do you a bit of good if you don’t follow it.
One other thing, don’t feel like your budget is set in stone. If you are having problems staying within a category then feel free to make some adjustments.