Budgeting is one of the smartest financial planning moves anybody can make. So, we’re breaking down the budget process–to show that you CAN start and stick to one. In part one of this series, we covered tracking your income and expenses–or how much money you have going in and out each month. In this part, we’ll see if your net income is positive or negative, and break your budget down into categories.
The Third Budgeting Step – where do you stand?
This step is easy! You simply add up your monthly expenses, and add up your monthly income; then, you subtract your expenses from your income.
- A positive amount = you’re bringing in more money than you’re spending
- A zero amount = you’re spending exactly what you’re earning
- A negative amount = you’re spending more than you’re earning
This isn’t a good thing, but, after you’ve set up a budget, you should at least be able to recognize why this is happening and probably address and correct the situation.
The Fourth Budgeting Step – examine your expenses
The fourth step to making a budget involves only your expenses. Here, you’ll be sorting your expenses into two (or more) categories. The first category involves necessary expenses, or things you have to pay.
Fixed necessary expenses:
- Rent or mortgage payments
- loan payments, like student, car or credit card debt
- insurance payments, such as renters, health and automobile
- retirement plan payments
- cell phone and internet bills
Varying necessary expenses:
- Pet costs, such as food, supplies and vet visits
- transportation costs, such as gas or transit passes
- utility bills, such as trash, electricity and water
- medical expenses
After you’ve got your necessary expenses figured out, it’s time to look at your other expenses. These are generally the more fun things you spend money on, and we’re going to call them your secondary expenses.
- Live entertainment, such as movies, concerts and plays
- Cable or streaming subscriptions
- meals or drinks out
- charitable donations
OK! Now you’ve got your expenses sorted into two categories. If your budget was negative before, it’s time to look at your secondary expenses and see what spending habits you can reduce or get rid of. This doesn’t mean, however, removing all the fun from your life; if your Netflix subscription gives you immense joy, maybe eat in one or two times a month more instead.
If you budget was positive before, it’s time to look at your debt. You can probably afford to pay more each month to your retirement savings, your student, auto and home loans, or even your credit cards.
In the next installment, we’ll be looking at slicing your budget down into even smaller components, and setting budgetary goals.