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Introduction to budgeting

The key to staying on top of your finances

Why have a personal budget?

A personal budget is a very useful tool, helping you to reach your financial goals and establish what you really do and do not need. It also gives you perspective, helps avoid unnecessary purchases, and answers the commonly asked question: “Where did all the money go?”

How to get started

Your first step is to track and write down all your personal income and expenditures for at least one month. The key is simplicity. This can easily be done with a lined notebook-an accessible and handy tool, easy to keep with you. At the end of the month you will examine your budget and notice the areas in which you can improve.

Within income, you will have salary and other sources of revenue. Expenditures will include several categories: housing, transportation, entertainment, etc. You will then need to separate fixed expenses from variable expenses. Fixed expenses include rent/mortgage, insurance, car payments, etc., and variable expenses are those that change from month to month-groceries, utilities, entertainment, etc.

The last step is to add up all your fixed expenses and subtract them from your total income. The result is what remains for variable expenses. This area is often a weak spot for many of us, but the easiest to change. Controlling your variable expenses will be your key to success. Most families are amazed at how much money goes into many small purchases and quickly discover how they can improve by cutting down on unneeded expenditures. These weak spots will often include the numerous “what’s three dollars here and there” purchases, keeping you from reaching your financial goals.

Here is an example of a budget worksheet that takes both fixed and variable expenses into account.

Allocation guidelines

Although allocation of funds varies from person to person, depending on personal goals, it is suggested to allot the majority (20-30%) of income to housing, 15-20% to food, and at least 5% to savings. It is also very advisable to build an emergency fund. Here are some allocation guidelines for your budget.

Some final tips

The key is in reducing your variable expenses so that you have money left for the things you need. At the same time, you want to adopt a simple method. Don’t overwhelm yourself by trying to improve in every category all at once. Focusing on one key area per month will be a much more constructive and successful approach.

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