Matching your expense with your earnings or income is commonly known as budgeting, or budget planning. A budget can be thought of as a planning of what you want to spent and how you are going to get the funds to pay for that. That may sound a bit complicated, but it really isn’t. This article describes a very simple method of creating and monitoring your own personal budget.
Step 1: Record your expenses
The first step is to find out where all your money goes, what do you spend it on. There are various ways of doing this, but an easy method that works is to simply write done all your expense in a notebook, for at least one month (preferably longer, as expense will not be the same every month). Every expense is written down, with the date, the amount, what is that you spent the money on and whether it was a recurring expense or not. Recurring expenses are things like groceries, gas, mortgage, energy bill, magazine subscriptions and your daily Starbucks-coffee, so basically all those things that you buy on a (more-or-less) regular basis. Non-recurring expenses are things like birthday presents, holidays, etc.
At the end of this month (or longer) you will have a nice overview of all the things that you spend money on during that period. This step alone will give you great insight into your personal spending habits!
Step 2: Organize your expenses
Once you have all your expenses neatly written down in your notebook, the next step is to organize them, or group them together into categories. This is fairly simple, because we already marked them as either recurring or non-recurring. First thing to do is group all the non-recurring expense together and add calculate the result. This amount will vary from month to month, but at least you now have some indication of how much money you spend irregularly. Next comes grouping the recurring expenses, which is a lot more valuable. Group things like all your expenses related to living, energy, eating/drinking, work, transportation, creditcard-loans, etc. Try to find the categories that work best for you, by looking at your expenses and see what they have in common. If you have three or more expenses that have something in common, make it a categorie. Once you have done that, most of the hard work is behind you. You now have a categorized overview of everything you spend your money on in a typical month. Have you found any surprises so far?
Step 3: Look at the bigger picture
Now that you have your monthly expenses, both recurring and non-recurring, it is time to look at things that you only spend money on once (or a few times) a year. These can be things like insurances, taxes, car repairs, etc. Look through your bank statements or bills and try to find as many of those as you can, but focus on the larger ones. Once you have them identified, add them all together and divide the total by 12. You now have a monthly reservation for all those (semi-)annual expenses.
Step 4: How are you going to pay for it?
The fourth and final step to this simple budget planning method, is finding out how you are going to pay for all of this. You do this by simply writing down all of your regular income sources (usually this will be limited to your paycheck, so it’s quite easy to do) and add them all together. This how much money you make in a month, which also happens to be your spending limit.
Now comes the magic: compare your monthly earnings to your monthly expenses (from step 3). How are you doing? Are you spending less than you earn (hopefully YES), or are you spending too much? If you earn more than you spend, put the difference in a savings account, automatically if you can. If you overspend, you have a serious challenge ahead of you. Cutting down your expenses is usually easier than growing your income, so the best thing to do is take a good look at the expense list you created in step 3, and see which things you can minimize or maybe stop doing completely. Do you really need all those magazines? Is your daily coffee that important?
You now have everything you need to control your earnings/spendings balance. You should check this balance at the end of every month, and see if you need to change things (maybe because of new sources of incomes, or cutting down on your expenses).
This 4-step method is a nice way to start getting a grip on your finances, by planning your budget. It is however quite limited and you have to do everything by hand. Luckily there are lots of products and services that can make budgeting a lot easier. Some banks even offer budget tools integrated with their online banking system, which of course is perfect. You can also use predefined budget sheets, which have standard categories for standard expenses, such as:
The most important thing is get a grip on your finances and keep that grip, that is the true key to financial success!