Believe it or not, creating a budget is the single most important thing you can do for your finances. That’s because, without a budget, you give up control of your money and you allow other things, like the market, circumstances and others, determine how your money is spent. Even sports stars and celebrities who’ve made millions of dollars through their career have ended up bankrupt. Why? What it comes down to is that if you don’t know where your money is going, it doesn’t matter how much money is coming in – just ask Mike Tyson.
The very first thing you need to do is to figure out how much money you are making. While this may seem relatively easy, many people make this simple mistake. They look at the number that is printed on their check to tell them how much they earn per pay period. But, what about your gross income? The amount that isn’t printed on the check, but that’s given to you every check before taxes and deductions? The reason why knowing your gross income is so important is because once you know your gross income, you can do some things to change your net income, or the amount that’s printed on the check. You can change the number of exemptions on your W-4 tax reporting form to reflect your most current status. You can re-evaluate your benefits and see if the coverage you have makes the most sense. And if you hold multiple jobs, you can keep track of how much taxes you pay by adjusting your W-4 again. The other reason why knowing your gross and net incomes is that it’s important to see taxes, benefits and other deductions as part of your monthly expenses. It’s not something to ignore and just accept.
The second thing you need to do to create a budget that works for you and not the other way around is to create a list of all of your expenses and put them into categories. For example, you could determine that your monthly expenses on gas, toll and maintenance comes out to $400 a month. Under “Car” or “Auto” as the category, or whatever else you want to call it, list out each item (gas, toll, maintenance), and an amount for each item. For example, $300 for gas, $50 for toll and $50 for maintenance. If you do this for all of your expenses, including the ones you don’t even think about like coffee, snacks, soda, candy, impulse shopping on the web, etc., you can see exactly how much money you need every month just to break even. If your net income is below this amount, you have a problem. Even if your net income just breaks even with a little left over, you still could have a problem. But knowing how much you’re spending versus how much you’re making is the key to creating a budget.
Now, the key to keeping your money and making your budget something you’ll love to update, check up on and adhere to, is to automate it. It doesn’t make sense these days to keep a paper and pen journal of all your daily expenses when a computer can do that for you much more accurately, faster and better quite frankly. You can track your expenses online with free sites like Mint.com, or you can purchase software like Microsoft Money or Quicken to do it for you. With Microsoft Money and Quicken, you can do a lot of neat things like creating reports, charts, break down spending by categories, track down past purchases, track your cash flow, store your financial information, etc. Once you get more experienced in budgeting, these programs will become a powerful tool to keep track of your expenses and forecast future expenses. Wouldn’t it be cool if you could know how much money you have in your bank account on any day you chose in the future? If you had either of these programs, you could.
Make no mistake about it: sticking to your budget is the most difficult thing to do, and obviously the most essential. How do you stick to your budget? That’s another topic and another story to tell in the future, but for now, you’re learning how to create a budget and keep more of your money. But, if you can and do stick to your budget, you’ve already created a financial plan and have built a very solid foundation on which you can build. It’s something you should be proud of, and remind yourself that doing the little things like budgeting and sticking to it will pay huge dividends in the future.