Let's first define what is meant by the word BUDGETING. It is the discipline of
managing
your expenses. You have so much INCOME coming in and from that amount, you have EXPENSES being taken out. Just to be clear, the income you take home is your NET INCOME, not your gross income. It's what you keep minus your taxes and any benefit you receive from your job, such as: health insurance, any 401K contributions you make, and other benefit programs you may have.
The money you bring home is the initial start of your budget. You may have money left over from previous weeks, so add that to the new money to give you your total income. This is what you must work with before determining what expenses you will pay. Now for the expenses.
EXPENSES
are broken down into 2 categories; Fixed and Discretionary.
Fixed expenses
are things that you must pay. Remember when we discussed NEEDS & WANTS? These are fixed expenses you cannot miss without dire consequences. Fixed expenses include: your mortgage/ rent, utilities, some insurances, health and auto to name a few. They are fixed because typically it's a set amount each month you can expect to pay. Discretionary expenses are like some wants and not necessarily needed. If the money isn't available, we can adjust. Maybe we don't eat out as much (dining and entertainment), buy that new pair of shoes (clothing), or purchase a piece of décor for the home (household expense), regardless, it's not a need and we need to realize the difference. Also in discretionary expenses is your credit card debt. The best rule of thumb is to charge no more than you can afford and pay it off monthly; but, should you carry a balance as some of us so often do, it's important to manage the payment so it meets the credit card minimum and within your budget.
Once you have determined the amount of money you have to work with, then add up your expenses. First the fixed; a must, then the discretionary, then the credit cards. If you would like a Budget Guide to help you get started- email me, and I will send it to you at no charge. There are also apps that can help you with Budgeting. Many banks and credit unions have apps that help you track your expenses and advise on budgeting, or you can try Mint.com who helps you track your spending as well. Once you have budgeted your money, you need to make it a goal to align your expenses with what the financial industry is recommending. The financial industry thinks a good percentage to use on fixed expenses is up to 50% of your income, variable or discretionary expenses can take up to as much as 30%, and savings should take up 20% of your income. Food for Thought!
We'll go into more detail about these percentages in December's article as we also discuss tackling expenses that only show up in certain months of the year, like insurance premiums or taxes to name a couple. So, for this month, try getting more familiar with your expenses and breaking them down to whether they are fixed or discretionary. I'm always here to help, so feel free to contact me if you need any.
I hope this exercise makes you feel more in control with your financial house.
