A budget measures your income (the money you make)
against your expenses (the money you spend). Budgeting helps keep
you from spending more money than you make. You can plan in advance
how you spend and save, and you'll be motivated for achieving goals.
Living by a budget is like being on a diet. It takes willpower to
resist spending money.
Steps to develop your budget.
1. Determine your net income. To calculate net
income, first determine how often you get paid. Use a different
net income equation depending on your pay schedule.
2. Determine your fixed and variable expenses.
Fixed expenses (such as rent) stay the same every month. Variable
expenses (such as groceries) change from month to month.
Fixed expenses include periodic bills (like car
insurance) that come once a year or more.
To budget for variable monthly expenses, take the
average of three months of variable bills (such as groceries).
3. Track and plan for large, periodic expenses.
Don't forget to include large, occasional expenses like tuition
and vacations in your budget. You never know when an emergency will
happen. If you don't plan for emergencies and periodic expenses,
you could be in trouble.
4. Compare Income to Expenses. The final category
on your budget worksheet is indebtedness, which means how much money
is spent to pay off debts or loans (such as credit
card payments). When you add up all the expenses in this category,
you have your total indebtedness.
5. Set Priorities, Goals
and Limits. Once you know your priorities, what's most and least
important, you can figure out how to spend your money. If taking
a vacation once a year is a priority for you, adjust your spending
in order to save money every month. Your priorities should fit into
your budget, not work against it.
Living on a budget
Living by a budget is like being on a diet. It
takes willpower to resist the temptation to spend money but becomes
easier as it becomes a habit. Learn how to save money and spend
money wisely, and you're on your way.