If you’re like many people, you look forward to making a household budget about as much as you do going for a routine doctor’s visit or taking your car in for maintenance. However, just as the doctor or the auto mechanic can avert disaster, so can a budget. By making one, you can tell if you’ve gone off track financially and can get yourself back on. Financial writer Lori Bamber advises thinking of a budget as your cash management plan.
Before you start your budget, sit down with your partner and discuss your financial goals. This gives you something to work toward. Having a goal in mind can give you the strength to walk away from the $250 pair of jeans you really like but don’t need. Credit counselor Laurie Campbell in an article at Bankrate.com recommended taping of picture of your goal to your credit card. That should give you reason to put the card back in your wallet.
Know Your Expenses
Keep track of your monthly expenses for three months. This means recording everything you spend money on each day. You might be surprised on how much the nickel-and-dime stuff adds up. Divide your expenses into the four categories of housing, work, living and personal. So, for example, under housing, you list your rent or mortgage, property tax, utilities, homeowners’ insurance, cable, Internet and phone. Living expenses include any debts you have, food, eating out, clothes, auto insurance, life insurance, cell phone, prescriptions, dry cleaning and pet expenses. Work includes transportation, lunch, day care, parking and business clothes. Personal expenses include entertainment, alcohol, gifts, donations, haircuts and education expenses.
Once you have everything laid out in front of you, start making decisions. A good way to begin is to get your expenses in the housing, work and living categories to around 60 percent of your gross income. You might have to cut some of your expenses to do this, such as cable TV and going to restaurants. Once you get your expenses to a manageable level, you have 40 percent of your income to work with. Put 10 percent into retirement savings, such as a 401k or an IRA. Put another 10 percent into emergency savings in case you or your partner has a health issue or loses a job. However, if you have debt that you need to pay off, do that before you start your emergency savings. Another 10 percent goes toward short-term savings. This is what you use to pay for a vacation, a car repair or a new appliance. The final 10 percent is the personal category. You should be able to have some fun with your bucks and spend them however you wish, but try hard to limit this to 10 percent of your income.
Don’t give up on your budget if you cannot seem to get your expenses down to 60 percent. Many items that you believe are not negotiable really are. If you can’t afford your rent or mortgage, move to a less expensive place. If your car payments are too high, sell your car and buy a cheaper model. The key to creating a sustainable budget is to balance your spending with your income, leaving you room for the unexpected and for your future.
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