Why do I need a budget?

Today’s column continues our series of up-to-date tips and reports that will help a family prepare a reasonable, affordable financial plan with a goal of achieving financial freedom.

One of the first steps to financial freedom is planning and following through on a budget, a personal spending plan. Budgeting is about choices – choosing how to make money and choosing how to spend money. It can help you make the most of your money and reach your financial goals. It is your personal strategy. Putting your budget down on paper helps you see where you can improve and make better financial decisions.

A budget is an effective way to start taking control of your financial situation. It provides a set-by-step plan for meeting expenses in a given period of time.

Following a budget helps you reduce the anxiety of not knowing whether you have enough money to pay bills when they are due and gives you a sense of control over your money, rather than letting money have control over you. Budgeting helps you build assets that will improve the quality of life for you and your family.

How to budget – There are four steps to preparing a budget:

1. Keep track of your daily spending.
2. Determine what your monthly income and expenses are the month before they are due.
3. Find ways to decrease spending.
4. Find ways to increase income.

Step 1: Track daily spending – Do you know where your money goes each month? It is common for people to spend all the money they make and not have anything left over to save for their goals. Many people say they do not have anything to show for their hard work at the end of the month. How often have you taken $20 out of the ATM and, at the end of the day, not known where it all went? If you want to be in control of your money, you must understand where your money goes. To help you, start writing down what you spend your money on each day.

Step 2: Determine income and expenses – Income is money that comes to you from: wages; public assistance (including food stamps); child support or alimony; interest and dividends; social security; other sources, such as tips. In tracking income and expenses, it’s helpful to create a monthly income and expense sheet. First, you’ll want to create an income column where you will list monthly income sources and income amounts on the left side of the page. Gross income is your total income without deductions. Net income is gross income minus deductions such as Social Security and other taxes. Next you’ll list monthly expenses on the right side of the page in your monthly expenses column.

There are two kinds of expenses: fixed and flexible. Fixed expenses are those with amounts that do not change from month to month. You do not have any control over how much you pay. Flexible expenses, on the other hand, are expenses with amounts that often change from month to month. You sometimes have control over how much you pay. An example would be if you decide to raise your thermometer during the summer to save on cooling costs so that you will pay less than you did the month before.

There are some expenses you have some control over before the initial agreement. They become fixed expenses after you have signed a contract. You want to shop for the best value before committing to the payments in choosing such items as car payment and car insurance, loan payments, health insurance, and day care or elder care.

The other group of expenses on your worksheet is your flexible expenses. Consider your needs versus your wants on some items where you can cut expenses. It’s important to put money in your savings account (pay yourself first). With gasoline for your car, there are ways to control costs such as conserving energy by keeping your tires properly inflated and observing the speed limit. Electricity can be conserved by installing ceiling fans. You can cut water costs by conserving energy by installing low-flow showerheads. Telephone expenses can be reduced by eliminating extra services. Food expenses can be reduced by shopping for items on sale and by using coupons. For your budget worksheet you will need to estimate the amount of flexible expenses you pay each month because you aren’t always sure what the exact amount will be.

We’ll continue our discussion about budgeting in the next column.

NHS is a 501(c) 3 non-profit HUD-certified housing counseling organization. All services are provided free of charge. Partners include the U. S. Department of Housing and Urban Development (HUD), HomeFree USA, Florida Housing Finance Corporation, Florida Hardest-Hit Fund, Pinellas County Community Development and the City of St. Petersburg. Sources for this article include Hands on Banking and the Federal Deposit Insurance Corporation’s Money Smart.