Prepare Before You Budget

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Before developing a personal financial plan or budget you need to understand your feelings toward money and the role money plays in your life. As you allocate money to certain categories you need to make choices. More here and less there. How much to save and will this be paid first or last. Will you pay cash for everything or utilize credit. Do you give to your church or make charitable donations.

Each person’s situation is unique. It’s important for you to come up with your own questions. If your budget is designed around your needs, wants and attitudes you’re more likely to succeed. With couples it is crucial that they discuss financial issues, their individual histories and attitudes toward money and design a budget that is acceptable to both of them. One partner should not make the choice alone and then try to force it on the other. Even in situations where one person makes more money or one person does not work – it should be viewed as our money. Each person involved needs to have a positive attitude toward budgeting, regardless of their financial contribution.

Before making a budget you need to know how much money you are earning and how much money you are spending. A lot of this information is in your bank statement, if you have an account. If not you will have to get receipts. Some expenses (fixed) are the same amount each month. Other expenses vary. For these I recommend listing your expenses for one year and do an average. Expenses like utilities vary season to season. You’ll get a more accurate figure the longer time period you use. If you can’t remember then estimate. Don’t forget semi-annual and annual expenses. Think about everything you spend money for and make sure everything is listed.

Once you’ve listed all of your expenses you will need to list your income. If you earn the same amount each pay period this is easy. If your salary is variable you will need to do some type of average. Commission, bonus and overtime are three of the main things that cause irregular earnings, but there are many others. Only include income if it is regular, consistent and likely to continue. Infrequent income, such as Christmas bonuses, should not be counted unless it is your company and you are writing the check. Even then I might leave it out.

Two of the biggest mistakes we make in preparing a budget are not allowing for emergencies (we don’t put enough money in savings) and we count on income that never materializes or is less than expected (I’ll be able to make the car payment when I get my promotion). You need to include everything but leave out anything that is uncertain. It is better to have extra money in your budget than not enough.

Once you have all your income and expenses listed the next step is to do your budget. My recommendation is that you start by preparing your own, keep it simple and view it as a working project. You can purchase budget (bookkeeping) books at office supply stores and there are numerous programs online. Before going with one of these play around with your own handwritten budget first. There may be things you need to add or eliminate. You will get a good idea how budgets work and will make a better decision if you decide to purchase something different later on.

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Comments

2 Responses to “Prepare Before You Budget”

  1. Kelli Myers on April 17th, 2008 12:57 am

    Planning the expenses against the income can help in savings for the future. Most of the times people spend without planning and thus fall into debts. So budgeting is very important to carry on smoothly without having too many overdues.

  2. Budgeting 101 | Financial Learn on April 27th, 2008 2:11 pm

    [...] Prepare before you budget - You want to make sure you do it right the first time.  Prepare before you budget and avoid [...]

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