Creating a budget is a good way to manage your finances, and it's an important first step toward building a healthy financial statement and increasing your net worth.
To prepare and use a budget successfully, you'll need to plan for the expected and the unexpected — a process that includes monitoring, adjusting and controlling future income and expenses.
Budgeting is a learned skill, just like learning to manage any other routine of life — from starting a new exercise schedule to managing a family or a career. A good time to start is right after you’ve finished your taxes or a mortgage application — you’ll already have all your financial information together.
For your budget, you'll want to use your:
Categorize all income and expenses per month. Examples of the categories are:
Now you can take a closer look at each category. What categories tend to be consistent in amount? Once you've identified these areas, you can use them to estimate each category.
(For illustrative purposes only.)
There will be monthly, quarterly and annual patterns. For example, you may see that insurance premiums are paid in the first and third quarter, monthly food expenses average $200, utility bills generally average $50 per month but are 50% higher in the colder months. This is your model for standard expenses.
With this pattern in mind, planning future cash flows can be more organized, limiting surprises.
Grocery expenses are inflation-sensitive and will go up or down, while a fixed-rate mortgage is not. You'll need to account for inflation-sensitive expenses when you forecast next year's budget.
You can do this by considering plans and expectations for next year, including expected raises or bonuses, growth in investment income and sale of assets.
It's a good idea to organize your expenses by month, category and dollar amount. Make special note of the quarterly and semiannual payments — like insurance premiums and property taxes. These are usually larger payments and can cause problems with cash flow if you don't plan for them.
This content is intended to be general in nature and that a wide range of factors should be considered when creating a budget. Such factors will depend upon, among other things, an individual’s personal circumstances such as income, expenses, goals, etc.
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