For several months we have been experiencing inflation in America. Most things, especially essentials, cost a lot more than they did a year ago. Your income may be higher; Your expenses certainly are! That means it’s time to take a look at your budget.
In January we have to deal with the consequences of our Christmas expenses. We may have travelled. We may have used our credit cards a lot more than at other times of the year. We may have taken out short-term loans. Now it’s time for payback!
A budget shows you how much money you’re likely to bring in, and then compares it to your required expenses, like loan payments, housing costs, and insurance, and your voluntary expenses, like entertainment or dining out.
First calculate your income. Use net income or take-home pay from your paychecks. If this varies, use the average. Add income from other sources like Social Security or child support payments.
Nest the hard part: Make a list of your monthly expenses. Some expenses are fixed, which means you make the same payment as the rent every month. Some are variable, like groceries. Use your bank statements, receipts, and credit card statements from the past three months to identify all of your expenses.
Now you can create a structured budget to keep your spending under control. Account for 30% of your income for housing, which would include your mortgage or rent payment, property taxes, homeowners’ or renters’ insurance. With the way rent has gone up over the past year, you may need to cut back on 35% and cut back on spending on other things. Next, allocate 30% for other required expenses like utilities, groceries, car payments, car insurance, health insurance, day care expenses, etc. 20% should be spent on achieving financial goals. This may include paying off debt (loans and credit cards), setting up a retirement account, saving or investing, or giving to charity. Finally, 15-20% should be for necessities, including TV channels, clothing, entertainment, dining out, gifts, or toys.
There are several ways, experts say, to build your budget, so if this one doesn’t work for your financial situation, go online and do a little research. There are also forms that you can print out and fill out. Some financial experts recommend putting the money for wishes in an envelope as cash, and once it’s gone you can’t spend it anymore.
If your expenses are higher than your income, you need to save. Never spend anything on a shortage before you have something you must have or a bill that needs paying. Decide if you can cut some things like TV streaming or phone plans. Before you make any major purchase, put the payments in your budget and make sure you can afford them. Some expenses only come up a few times a year, so save for them. Budgets can be wrecked by bogus spending: withdrawing cash from ATMs, buying a cup of coffee or a drink every day, lottery tickets, impulse buying, late payment fees, or insufficient funds.
Every household should create an account that you only touch in an emergency. This fund could be used if your car breaks down, an appliance breaks, someone gets sick or you need to travel because of a family emergency. This should contain around $2,000, and you need to top this up as soon as possible once you’ve taken any money from it. It may take a while to reach that amount, but it’s worth knowing that you don’t have to get high interest rates or payday loans if something bad happens.
Discuss your finances as a family. Disputes over spending or saving money are the leading cause of relationship stress and divorce. The problem isn’t how much a household makes; so they spend. Not being open about how you spend and save, even with older children, can be a mistake. Sticking to a budget helps build positive relationships, avoid stress, and build financial strength.