Budgets don’t have to be confusing, even though some of them look that way. The lines and entries and dollar amounts can overwhelm at first glance. You might not even know how to use the information once you have it.
Each budget template has a few critical categories. Naturally, there are ways to drill down and get deeper into what you’re making and what you’re spending. But a simple budget that covers these areas will reveal what you need to know, and guide you toward smart choices.
Income makes up the bones of every budget. To start, list and tally each source of income, so you have a monthly total.
A stable monthly income, such as salaried wages, is the simplest scenario. Earnings that fluctuate make things trickier. For example, freelance or contract workers might not know from one month to the next what their earnings will be.
Get Rich Slowly suggests two ways to account for unpredictable income in your budget. One method is to project future monthly earnings by averaging the last 12 months. Another method is to use the minimum monthly income for the same period.
Where income fluctuates dramatically, such as industries with off seasons, a monthly earnings average works better. Where income fluctuates slightly, minimum monthly income projection works well. Bonus: On months where income is higher than the minimum, the extra can go toward savings, debt, or other goals.
By estimating safely, you won’t count on money that might not be there.
Expenses are anything that causes money to leave your hands. Fixed expenses cover items such as payments for housing, vehicles, loans and insurance. Variable expenses might be credit cards, utilities, cell phones, groceries and fuel.
Discretionary spending is also an expense, even though there’s no billing or payment structure. These are the most variable of all expenses, and most people have them. The soda that you buy on the way to work, a fast food lunch, a new bottle of cologne, and anything else that you don’t need but buy anyway — that’s discretionary spending.
The assets category shows things of value that you own, but aren’t necessarily part of your income. They could be property, jewelry, retirement accounts or a vehicle that’s yours free and clear. Anything with monetary value that you own is an asset, including savings accounts.
Assets play an important role in budgeting. While some generate income, such as rental property revenue, many assets don’t. But they do help determine your net worth. Each time you add an asset, such as monthly disbursements into savings or retirement, your assets and net worth grow.
Every budget needs a goal. Maybe you want to pay off a vehicle loan early, get out of credit card debt, start a college fund, or just learn to live within your means. Whatever your goal, a budget helps create a path to get there.
Ideally, your income outweighs expenses, and achieving your goal is just a matter of focus. If it were that easy, you probably wouldn’t need a budget. It’s common for expenses to outweigh income, which is how debt problems emerge. When you pay using credit because there isn’t enough cash, you’re increasing debt. Worse, whenever you spend money unwisely, you’re robbing the goal.
Budgets aren’t magic. They’re tools that show what you’ve got, where it goes, and help you plan a better, more efficient way.
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