The amount you have available to pay your expenses is your net pay (your income after taxes). You may also factor in overtime, bonuses, and tax return money (at that time of year). Be conservative, and don’t plan for more income than you know you can get. If you earn more, it will be available for your emergency fund or savings.
After you have listed your expenses and income, you can subtract your expected expenses from your expected income, and see if you will have enough to pay everything. If not, don’t panic. Now is the time to prioritize your expenses.
First, determine whether your expenses are necessary. Necessary expenses are not optional. Food tops the list, and it’s usually followed by housing (note that your rent or mortgage should be paid right away as penalties for late payments will eat into your budget quickly).
If your income doesn’t match your necessary expenses, review each expense, and seek out an alternative or brainstorm on ways to live without it. For example, you may live in a 1-bedroom apartment, but could save money by moving into a studio. If you have a car, you may be able to sell it and use a bus pass to get to work. Food choices can also be made. It may make sense to cut back on expenses that you can live without as you get your finances in order. Again, take a critical look at your expenses and find ways to reduce what you spend.
Make sure you are being realistic with your planned expenses. Don’t arbitrarily cut the amount without thinking about how you will do it. For instance, if you cut your food expense, you could do that by bringing your lunch to work, rather than going out to eat. That might save a few dollars a day. But if your food budget is $100 per week, and you think you can manage on $25 per week, that’s a big cut that might not be realistic.
Remember, too, that a lot of the expenses we deem necessary can be temporarily cut. Phone, cable and internet expenses are common examples. The public library is a great fallback for entertainment and internet needs.
After your necessary expenses, rank your discretionary expenses in order of importance. That will help you determine what to pay, and what to hold off on if you don’t have enough money to cover everything.
Now, you should have the foundation of your budget — a list of expected monthly expenses which total less than your net pay.
Managing your Budget
The key to using a budget is to set aside money for your expense categories and track your actual results. There are several ways to track expense including spreadsheets, free apps, or the old-fashioned tracker … a pen and paper.
What is important is that you track each expense against your budget. Try not to spend more than the amount you have allocated to an expense. You can shift how you allocate your money, but it is best to do it within the same category when you can. If you have to, you can shift between categories, focusing on removing lower-priority items, or those where you have more discretion.
Again, don’t be alarmed if you don’t match your budget out of the gate. Over time, you can modify your budget to fit your actual expenses, and you will continuously improve your spending habits. No matter how much money you make, it takes discipline to shape your spending to meet your plan. It’s human nature to spend money that’s available.
Following your budget, and making sure your prioritized expenses are always paid first, will help to ensure your budget stays in check and that you don’t end up in debt each month. It’s also a great way to determine what is truly necessary and what you really could do without.
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.
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