A budget is a simple personal finance tool that summarizes periodic money flow. A budget is useful because it reveals spending waste, aligns spending priorities, controls spending, transforms money into a tool (not your master), and forces you to think about money. For a family, a budget may function as a crisis prevention tool due to its capabilities to start a family discussion on money and coordinate efforts to better manage money.
As popularized by NEFE High School Financial Planning Program, five simple steps to create a budget are:
- Decide on a time frame
- List all types of income
- List all expenses under their categories
- Balance you total income and total expenses
- Study your budget
These steps are illustrated in the budget example below with their correspondent step number inserted.
Further elaborations on the steps involved:
Step 1: Decide on a time frame
Usually your time frame selection depends on the frequency you get paid (e.g. bi-weekly, monthly)
Step 2: List all types of income
Other income sources: Alimony, scholarship, odd jobs, rent payment received, public assistance
Step 3: List all expenses under their categories
Note that savings are put in this section. In fact, savings is the first item you set in the Estimated Fixed Expenses. Known as Pay Yourself First (P.Y.F.), this is a savings type you allocate to yourself in the very beginning and not at the end of budgeting when you have leftover income after allocating for necessary expenses and savings. .
Other fixed expenses include saving for other purposes (specify), car payment, and daycare expenses. Other variable expenses include auto expenses and pet food. In this section, we focus on the essential ones. Fixed but non-essentials such as cable service go in the Discretionary Expenses
All other (fixed and variable) expenses are placed under the estimated discretionary expenses. They include fast food, movie, gym membership, clothes, parties, donations, barber/hair salon, and school books
Step 4: Balance your total income and total expenses
An example budget at work: If the Total Estimated Expenses was $1,300 and you can’t increase your income in the short-term, you would decrease your expenses. With this expenses breakdown, the logical place to find items to reduce is the discretionary expenses category. For instance, you may halve the last two items to balance the budget.
Step 5: Study your budget
Besides figuring out where to survive the month like in the “A budget at work” example above, a budget may lead one to cut unnecessary spending, decide which spending to cut, and reach financial goals in the longer term.
Ideally, before building up a budget, you should have financial goals. A SMART financial goal example is to afford a summer 2013 trip if you continue to save $25/month from now. This will motivate one to save or look into its feasibility. Your goals and budget may be altered after revisiting and comparing them.
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A budget does not have to be perfect especially in the earlier stages. This is partially because a budget can get very complicated with some income and expenses not occurring periodically, accidental expenses, the ability to fund expenses savings/credit, etc. In addition, a budget focuses on money flow, not on the (long-term) wealth accumulation, i.e. net worth.
This is an oversimplified example of a budget for a single person. A real-life one may get very complicated, especially when a larger family is involved. Despite its potential complications, a budget is a very useful financial tool.
More information on budgeting is available at: Managing Your Money: Where Does All the Money Go? http://aces.nmsu.edu/pubs/_circulars/Cr-592.pdf. The DOCX version of the infographic above is available at: http://bit.ly/nmsubudget1.
Two Futurama exhibitions were held in and 1939 and 1964 with the goals of previewing the future to the present’ers. Those who attended the exhibits were provided with “I HAVE SEEN THE FUTURE” badge.
