Budget 101
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Budget 101 |
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Creating a family budget is one of the primary key to good financial health. A
budget allows you to see a realistic snapshot of your financial responsibility.
Whether it is grocery shopping or paying the monthly electric bill, we're faced
with family budget decisions all the time. It's always difficult to deal with
financial planning matters such as family budgeting. No matter how people might
try to deny it, we make decisions all the time that affect our ability to stay
out of debt. The key to success is taking a proactive approach to handling our
debts and making informed choices on how and when we spend our money.
Unfortunately, for many of us budgets are a reality check that we try to avoid. No matter how hard you think you can make a budget work, family income must be greater than family expenses. Families that find themselves on the verge of bankruptcy, or in debt, are in that situation are in that situation because they chronically break this simple rule. If you don't have the right balance, then you can do two things: Increase family income and/or Decrease family expenses! If you start the year or create a family budget that is not balanced then you are only kidding yourself. Don't plan on hitting the lottery, plan on paying your bills. By taking a close look at your sources of income and where all the money goes each month, you'll generate better ideas on ways you can save money each month. You can spend money on software or other programs but the easiest and most cost effective way to start a budget is to simply use a spiral notebook. The first step in creating a solid family budget is listing all your monthly income. Paychecks should be listed by the net pay and only count funds that you know you are getting. If you have commissions or other income that varies, you will have to go back and look at the last 6-12 months and come up with an average. Remember fudging the numbers will greatly reduce your ability to stay on budget! Once you have your income complete, start a second page listing the fixed expenses. fixed expenses are items that you are unable to reduce and are the same amount every month. They may include:
The third section is your controllable debts. this is the area where you have the most flexibility on your budget to lower lower your expenses. Items to include are things like clothing, food, leisure spending and such. The more detailed you make your budget, the more accurate it will be and the better you'll be able to track your expenses and find areas to cut. Don't forget to take a little off the top each month for savings; think about setting up an automatic transfer from your paycheck. Don't count on saving whatever's left over at the end of the month because expenses routinely expand to consume available income. Think of the family budget as your roadmap to financial independence. Try the 50/30/20 budget. Here's how it works:You start with your after-tax income. That's your gross pay minus any wage-based taxes, such as withheld income tax, Social Security and Medicare taxes, and disability taxes. If your employer deducts other expenses from your paycheck, such as 401k contributions, health insurance premiums and union dues, add those back into your net pay to get your after-tax income. You aim to limit your "must-have" expenses to 50% of that after-tax figure. "Must-haves" include all the basic expenditures you really need to make each month: outlays for housing, utilities, transportation, food, insurance, child care, tuition and minimum loan payments. If you can delay a purchase for a few months with no serious consequences -- for example, clothing or dining out -- it's not a must-have. If you're contractually obligated to pay something (a credit card minimum, child support or a cell phone bill), it's a must-have, at least for now. Your "wants" can consume 30% of your after-tax pay. Vacations, gifts, entertainment, clothes, eating out and other expenses are all "wants." Some bills you pay might overlap the two categories. For example, basic phone service is a must-have. But features such as call waiting or unlimited long distance are wants. Internet access and pay television are two other expenditures that can feel like must-haves but usually are wants, unless you're on some kind of long-term contract. Savings and debt repayment make up the final 20% of your budget. Warren's a bankruptcy expert, remember, and she knows the devastation that results from too much debt and too little savings. To achieve financial independence and minimize the chances of disaster, you need to get rid of consumer debt, save for retirement and build your emergency fund. Any loan payments you make above the minimum belong in this category, as do contributions to your retirement and emergency funds. |
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