Budget. We hear the word all the time, but it’s more than enough to cause anxiety for the average person. People often think of a budget as financial, restrictive, and not so much fun. In reality, budgets are tools that allow you to keep tabs on your spending and make sure you’re getting the most out of your money.
Why should I budget?
No matter where you are in life, whether it’s early in your career, in retirement, or anywhere in between, you have goals that you want to achieve. We can use budgets to help achieve those goals, whatever they may be.
An example of a financial goal that everyone should have is to start or build on an existing emergency fund. With our most recent natural disaster, Typhoon Mangkhut, we can see how easily something unexpected can affect our lives and our wallets.
Let’s say you already have a solid emergency fund. Your next goal might be something a little more exciting, like a weekend getaway with your family in Tokyo or a back kitchen renovation.
Our financial goals, like us, are all different. This means that our budgets will also be different. Fortunately, the steps to budgeting are straightforward and fairly standard.
You have decided to do it, you are going to start a budget. What do you do after? The first step is to determine your income.
Since expenses tend to be monthly, calculate your income this way as well. To estimate your monthly household income, start by looking at paychecks. To avoid overestimating the cash on hand, only count after-tax or “take-out” money.
If you get paid monthly, it’s easy: just look at your paycheck for monthly take-home pay. But if you are paid weekly or biweekly, calculations will be necessary. To figure this out, multiply the net amount of a paycheck by the number of checks you will receive in a year (52 or 26, respectively). Divide the result by 12 and you get your monthly income. If your income fluctuates – say your hours change or you work freelance or contract – average three months of your income to get a good estimate.
Evaluate your expenses
Before you prioritize how you want to spend your income, it can be helpful to review how you actually spend that money. Examine receipts, bank and credit card statements, and (if you use it) your check register.
Make sure to include all of your expenses, both fun and essential. Classify your expenses into fixed (i.e. mortgage or loan payments), variable (i.e. groceries and entertainment), and periodic (i.e. vehicle registration or insurance) .
Then it’s time to compare your income and expenses. Do you use all your money every month or do you have more? How are your expenses distributed? Do you find yourself spending a lot more at restaurants than at the grocery store? Could your surprise expenses be accounted for in some way?
Make a plan
Now that you’ve figured out your income and spending habits, it’s time to log on and start budgeting. There are many tips. Here are a few :
- Enter your numbers in a spreadsheet. Categorize your expenses and assign yourself and your household certain amounts for certain categories such as groceries or weekend entertainment.
- Not too familiar with a spreadsheet? Find useful worksheets on the internet, grab a calculator, and sit down at your kitchen table.
- Automatically put a fixed amount from each paycheck into a savings account. If it becomes habitual, you ultimately won’t notice it and you won’t miss it.
- If you find that you are overspending, you probably won’t have to cut spending completely from your budget. It is generally more durable, and therefore more effective, to reduce than to exclude altogether. You might be able to save a surprising amount of money each month by having your favorite cup of coffee twice a week instead of every day, or by cutting back on an overly rugged cell phone plan.
- Periodically reassess your plan. You can do this monthly, six months, or annually. Are you comfortably achieving your goals? Still feeling a little anxious about not having enough savings? Take the time to review your budget and make adjustments accordingly.
- Budgeting is not just about cutting expenses. It is also about moving money. Look for areas where you would like to invest more.
- And always, always try to anticipate the unexpected!
When putting together an optimistic and realistic budget for your household, it’s important to include the whole family and make a real plan. Review and discuss your budget and rules with your family. Everyone will be more willing to make changes and make sacrifices along the way if they are invested in the goal and have specific things they can do to help achieve it.
Local financial institutions, like Bank of Guam, are also great resources when creating your budget and planning your financial and investment goals. Visit a branch near you for more tips and advice.
This article originally appeared on Pacific Daily News: Top tips for creating a family budget that is right for you