Making a Budget: Where to Start, Where to Prioritize

If you do not have a budget, now is the time to create one. Doing so may sound like a boring task, but it will make a significant difference in your life. Imagine having enough money each month to meet all of your expenses without having to worry. And a budget isn’t only for rent, utilities, and food. A good budget helps you put aside money for entertainment and even savings. So while making a budget doesn’t sound like much fun, it will boost your quality of life.

Determine Your Net Income

Before you start listing expenses, you need to know your exact monthly income. That means subtracting the taxes you owe from your gross income to arrive at your net income. Your employer lists that amount on your paystubs, but if you are an independent contractor or freelancer, you will need to estimate your yearly income and subtract your expected taxes, including the self-employment tax. You can also roughly figure out how many deductions you will have at year’s end.

List Your Fixed Expenses

Your fixed expenses are those bills you have to pay each month. Utilities, rent/mortgage, food, childcare, loan payments, and insurance are some common fixed expenses. Like it or not, you have to cover them in order to survive. Many gas and electric companies let you pay on budget billing, which means they average your costs for a year. That way you can better plan this expense and not be stunned by your January or July bills.

An average budget might call for 30% of net income to go for housing, 15% on food, and 10% on utilities. Some geographical areas have much higher housing costs than others, so this division may need to be adjusted.

List Your Variable Expenses

These expenses are those you may feel are necessary, such as a gym membership, but could be left out of your budget if you need to. Gifts, clothing, and dining out are other variable expenses. You may consider them covered by your disposable income or income spent on items that you want but do not strictly need. You should also put aside some money in savings each month for an emergency.

Reconcile Your Income with Your Budget

When you add up your fixed and variable expenses, you may find that they exceed your monthly income. That means you have to put the excess expenses on credit cards or otherwise go into debt each month to meet your obligations. The hardest part of making a budget is setting your limits and sticking to them.

If you need to make cuts, go through your variable expenses and decide where you can economize. Maybe you can spend less on clothing, cut some of your streaming services, or limit eating out to twice a month.

You can also look at your fixed expenses and see if you can economize on heating and cooling (setting the thermostat differently) and lower your grocery bill by buying in bulk. When you are finished with your budget it needs to be one you can stick to.

Budgets are Best

Some people avoid budgets because they do not want to face the reality of their financial situation. That’s a common and understandable reaction. But putting together a reasonable budget should leave you money to pay for everything you must have and some of what you want.

By: Katherine Robinson, a writer for Laser Printer Checks