In personal finance, budget making is crucial as it’s necessary for managing your income, savings and investments. The best way to make a budget is to start by listing your expenses. In doing so, you should separate your fixed from your flexible expenses. Fixed expenses are set amounts such as rent or a mortgage as well as loan payments. Flexible expenses are those that may change each month such as food costs and utility bills.
It may take a few list making sessions to make sure you’ve recorded all your expenses. You won’t be able to make a budget that’s helpful for you unless all of your expenses are taken into consideration. In addition to all the costs necessary to run your home, also consider transportation, groceries, clothing, pet care, gifts and insurance as well as any other expenses you may have. The next step in preparing a workable budget is is to subtract the amount of your expenses against your total after taxes, or net, income.
If the difference is negative, it means you don’t have enough income to cover your basic expenses or for savings or investments. In that case, you’ll need to trim your flexible expenses and hopefully be able to earn additional income to better meet the fixed costs. If you can find a part-time job in addition to your regular work, this may not only help you fill the income gap, but also give you another money making position in case the worst happens and you lose your main source of earnings. When you make a budget and consider your expenses as well as your income, you should also plan for the worst case financial scenario as much as possible.
An emergency savings fund should be the first thing you add to your budget if the difference between your income and expenses is positive. Ideally, a savings of six months to a year of what it costs you to live should form your emergency fund. By setting aside savings from each paycheck, the emergency fund can be gradually built up. Only when you’re able to create a good savings base should you even consider investing any money.
Other than expenses and savings, as well as good investments if your finances allow, a spending allowance should also be established. If you give yourself a fair allowance to spend on whatever you want, it can help you find it easier to set aside money for your savings. The important thing is to always put your savings money aside first, then pay yourself your budgeted allowance. Trying to make a budget without allowing yourself any cash to spend isn’t realistic and may drive you to spend money that belongs in your emergency savings.