A budget is a way of keeping track of the money you earn and what you plan on doing with it. Most people don't like creating or using a personal budget since it usually means having to do without. If you create a budget and follow-it, you can avoid some of the traps that others fall into such as: too much debt, too little savings, too much spending. We have a budget worksheet that you can use to create your budget or you can create your own.
Your budget should include everything you spend money on, right down to toothpaste to your daily coffee. Some common routine expenses include: housing, debt, insurance, taxes, transportation, health care, entertainment, personal, children, giving, vacations, recreation, saving/investing.
Expenses are broken down to fixed and variable. Fixed expenses are items that don't vary in amount from month to month, while variable expenses do vary from month to month for various reasons.
After you have figured out fixed vs. variable expenses you break them down into nondiscretionary vs. discretionary expenses. Fixed: - Mortgage - Rent - Car Payments - Auto Insurance
Variable: - Food - Utilities - Entertainment - VacationsNondiscretionary expenses are things you MUST pay for or buy (food, rent or mortgage, car payments, utilities), while discretionary expenses are those that aren't necessary (vacations, entertainment, memberships).
When it comes to budgeting, and trying to find extra money, it is the discretionary expenses are the ones to curtail. It comes down to your choices. You can either control your discretionary expenses (skip the vacation this year) or limit your nondiscretionary expenses (move into a smaller place, cut back on the thermostat, etc.).
When it comes to figuring out where you need to cut expenses, you'll find spending ratios to be useful tools. A spending ratio is simply the percentage of money, as it relates to your disposible income (your total income minus income tax on that income), that you use for a particular area such as housing or entertainment. If one area of expense becomes too great, you'll see that ratio is too high and can begin to cut back.
Recommended Spending Ratios
Housing and Utilities 28%: Mortgage, rent, property taxes, insurance, repairs and improvements. Gas, electricity, water, trash, sewer and telephone. Food 13%: All food items, dining out, and pet food. Clothing 5%: All clothing purchases, shoes and alterations. Transportation 13%: Gas & Oil, repairs, insurance, parking & public transportation. Personal 11%: Club dues, admissions, hobbies, postage, tobacco, cosmetics, hair cuts, vacations, and holidays.