How to Budget

Budgeting Basics

Each month, you have income and expenses. Since your budget is your plan for your money, you need to decide ahead of time where each dollar goes.

It is helpful to break down your income and expenses into categories. Expenses break down into Essentials, Discretionary and Savings. Income can be Regular Income and Irregular Income.

To get started, put down all your expected income. If you have irregular income like tims, commissions or bonuses, underestimating is safest. Then list out all of your expected expenses in order of importance. Assign your best guess for each expense. Some expenses are easy to guess like rent or mortgage. Others, you can estimate like your power bill. It is safest to overestimate variable bills so you don’t get caught. Work your way down your expenses until your expenses equal your income.

It is important to include saving in your list of expenses. Savings include both investing in retirement and saving goals like a new car or a down payment.

In your list of expenses, draw a line between all the expenses where something bad would happen if you didn’t pay…like a late payment or foreclosure. Everything below the line is discretionary spending. These are categories like dining out, lattes, gifts, etc.

How much you should spend on housing, cars, retirement, etc. are outside of the scope of this article. There is a lot of information from financial planners available on these topics.

Your goal, is a balanced budget. That’s where, all of your discretionary spending, your essential spending and your savings equal your income.