Where Does the Money Go?
Do you ever wonder where all your money goes? Many people spend their money in small increments without realizing how it all adds up. Usually, it is not that mysterious if you take the time to write it all down. As you begin to track your income and expenses, you can craft a workable budget you can stick with, to help you manage your personal finances.
Here are some steps to help you design an overall budget regardless of your situation:
- Track income and spending. To start, tally all your sources of income and track your spending for a few weeks or months. An easy way to do this is to keep a receipt for all expenditures over one dollar. You may also refer to credit and debit card statements, monthly-bill statements, and check stubs.
- Categorize expenses. Expenses fall into two basic categories: fixed—not optional—which includes mortgage or rent, insurance, and utilities; and discretionary—optional—which includes clothes (beyond the basic necessities), movies, sporting events, and dining out.
- Set goals and prioritize. When you begin to see how much money comes in and how much goes out, you can prioritize your future financial goals. Do you want to buy a house or a new car? Are you saving for your retirement or your children’s college education? Are you paying down your debt? Once you establish your priorities, you can begin working toward achieving your objectives.
- Prepare the budget. Now that you have an idea of your current monthly income and expenses and have established some priorities, you are ready to prepare a budget. Remember to keep it simple. The less complicated your budget is, the easier it will be to maintain. For instance, to estimate monthly tax bills or insurance premiums, simply calculate the annual expense and divide by 12. It may take several attempts before you finalize your budget; however, you will eventually be able to zero in on which expenses need to be cut to reach your financial goals.
- Stick to it. Review your budget on a regular basis with your family, so that everyone is reminded that the budget is effective only if everyone sticks to it.
Conduct an annual review. Be sure to review your budget at the end of each year. By totaling what you spent and comparing it to your projected budget, you may identify areas to focus on during the coming year.
“Rainy Day” Reminders
After your household budget is created, remember to work toward setting aside emergency savings for that “rainy day”—when something unforeseen occurs, such as a job loss or unexpected damage to your house requiring a major repair. An emergency savings fund typically covers up to six months’ worth of living expenses. You can put money into this fund either weekly or monthly. Also, closely monitor your credit card use. Because a credit card is so easy to use, many consumers buy merchandise they don’t really need, which, in the end, costs more when interest charges are added to the monthly payments.
Having a household budget is a money management tool that both individuals and families can use to keep track of their personal finances, to reach their financial objectives. A spending plan may even serve to teach children to establish positive spending and saving habits early on.