Preparation and planning are key ingredients to succeeding at almost everything. “By failing to prepare, you are preparing to fail,” Benjamin Franklin once said, and this is especially true when it comes to your finances.
There is no better roadmap for your finances than a budget. It allows you to adapt to “surprises” in your income or expenses (good or bad), while ensuring you can reach your financial goals.
For many, the goal of budgeting is matching their income to their expenses — aka “making ends meet” — and trying not to run out of money until the next paycheck arrives. For others, the goal is building a savings account or nest egg. Whatever your goal, prioritizing your expenses can help you decide how to allocate your funds.
Planning and recording your expected income and expense items is important, but tracking your actual income and expenses against your budget over time is even more important. It gives you a realistic view of your financial situation while keeping your goals in mind.
All plans are based on assumptions. Some assumptions will come true, but some may not. Here’s what’s inevitable, though: you will have unplanned expenses or disruptions to your income that will require you to modify your budget.
That’s why it’s important to create and stick to a budget. It takes practice and discipline, but it’s always worth the time and effort.
How to create a budget
The first step is writing down your goal. If it’s saving money, set aside an actual amount you are trying to save and write out why you need or want it. It is ok to have more than 1 goal.
After documenting your goal(s), you need to do two things: 1) research your last month or two of expenses, and 2) list your typical monthly expenses.
If you pay your expenses in cash, it may be challenging to recall what expenses you incurred. There are a few places you can check: your calendar or day planner might jog your memory. If you have a checking account, review your statement. If you use debit or credit cards, you can review those statements as well.
Types of expenses
Once you’ve collected all your expenses, consider allocating them into categories. The following list may cover most of your categories, but you can add more to fit your needs:
- Monthly living expenses/housing – This includes your rent or mortgage payment, utilities such as electricity, natural gas or heating oil, garbage, and water), and other recurring expenses attributable to your housing costs.
- Transportation – This includes expenses such as car payments, gasoline, insurance, repairs, and/or bus fare.
- Meal Costs – This includes the amount you spend at grocery stores, convenience stores and restaurants.
- Medical expenses. This includes insurance, prescriptions, and related expenses.
- Child care expenses – This can include school costs, supplies, daycare and other items related to your children.
- Telephone/Internet/Cable – These costs could include subscriptions to radio, cable, or other information services, such as newspapers or magazines.
- Clothing – Remember to include coats, boots, and clothing for special occasions.
- Entertainment – Going out to movies, going to the local pub, or travel expenses. These are often discretionary expenses. Plan for and watch them closely because they can easily dent your budget.
- Miscellaneous – This category is designed to catch other recurring expenses that you may have.
- Emergency fund – This is your unexpected expenses fund. You know unexpected expenses such as car repairs will come up at some point. You should put an amount aside each month to build up this fund.
- Last, but not least, savings for your goal – Many advisors recommend that this should be your first consideration. I agree with that once you have a budget established, and you are managing to meet it. When starting out, it can be a challenge to meet all your bills with your income, and it’s ok to build slowly toward your savings goal.
Now that you’ve listed all your monthly expenses, you can turn to examining your income.
About The Author: Dan Wienckoski, COO, joined NCP Finance, the premier Credit Service Organization (CSO) lender in the country, in October of 2010. Mr. Wienckoski is a CPA and has extensive financial and operations management experience. In addition to holding operational positions in a credit union, a commercial bank, a finance company and leasing companies, Mr. Wienckoski worked in the short-term lending industry as a chief financial officer and vice president of business systems integration. He has a B.A. degree in both finance and accounting from Washington State University.
NCP Finance creates value and provides service excellence to CSOs. For reference, visit NCP at www.ncpfinance.com.
Information provided is not endorsed by Check `n Go and is for informational purposes only.