A budget is important. It is a way to ration your money so you don't run out. A way to figure out where you money goes and where it should be going. If you're frustrated by your financial situation, a budget can definitely help. So, get your information together and let's make a budget.
Things You Will Need-Your financial information
Step 1First, you'll want to gather all your financial information. Collect your income information (your pay stubs). Then also include your expenses. Make sure it's a complete list of expenses. Include the essentials like rent, utilities, food, car and also the often forgotten expenses like entertainment, miscellaneous, emergency fund, beauty care, etc. A budget worksheet can help you come up with a comprehensive list of your expenses. This is important, because often one forgotten expense can make or break your budget.
Step 2Next, make a personal income statement. To do this you'll create two headings: Income and Expenses. List all your income and add it up to get total income. Then list all your expenses and add it up to get total expenses. Then take total income and subtract total expenses. Look at the picture for a simple illustration.
Step 3Now, you have a rough outline of your situation. There are two possibilities. The first is that you have a positive income. The second, that you have a negative income.
1)If you have a positive income. Great you're on the right track. Now you can make an additional item under expenses to allocate your surplus income. Put in some budgetary slack, in other words, increase your expense estimates. For example, give yourself an extra $50 for entertainment. Now you can have more fun, and don't have to worry about going over your budget so much. Don't just let your money sit. Invest it, put it towards retirement, put it in an emergency fund, save up for a larger purchase. Whatever you decide, use your money wisely. If you look at the picture now, I have put money towards retirement, emergencies, and towards a vacation.
2)If you have a negative income. You need to adjust somewhere. Either increase your income or reduce your expenses. This can be done by finding another job, or cutting back on entertainment, cut back on non essential things, refinancing your debt. This will be a difficult step but it is possible.
Step 4Once you have a budget, an important step is to actually follow it. So you've only given yourself $200 for entertainment, and you're about to go over for a night out with friends. Rethink your plans. Sure you can borrow from the miscellaneous fund, but is it going to cause other problems? It's a personal decision, but following your budget will help you in the long run.
Step 5Revise your budget as necessary. As you live by your budget, you will come to see that it isn't always accurate. You might need more money in one area and less in another. New expenses come up and some go away. When it is appropriate, change your budget. However, don't just change your budget on a whim.